The exchange rate between the South Korean won and the U.S. dollar continues to rise, increasing volatility in the foreign exchange market due to policy changes by the U.S. and Japanese monetary authorities. Following the Federal Reserve's decision to raise its benchmark interest rate for the first time in over three years, the yen has weakened further, pushing the won-dollar exchange rate in the Seoul foreign exchange market close to the 1380 won mark.
On September 20, the won-dollar exchange rate closed at 1383.3 won, up 1.1 won from the previous day, marking a seven-day consecutive increase. This figure represents a rise of more than 47 won since it recorded 1336.1 won on September 9. During trading, the rate peaked at 1387.1 won.
The primary factors behind the rising exchange rate include the Fed's shift in monetary policy and rising international oil prices due to geopolitical risks. The Fed raised its benchmark interest rate by 0.25 percentage points to a range of 3.75% to 4.00% during its Federal Open Market Committee meeting. Concerns over delays in achieving inflation targets have prompted the Fed to resume monetary tightening, suggesting the possibility of further rate hikes this year, which has heightened market fears of prolonged high interest rates. This has led to increased selling pressure on the won due to concerns over capital outflows resulting from the widening interest rate gap between South Korea and the U.S.
Additionally, rising energy prices, with international oil prices exceeding $100 per barrel amid instability in the Middle East, have negatively impacted South Korea's trade conditions, which heavily relies on oil imports, further intensifying downward pressure on the won.
The impact of Japan's monetary policy is also linked to these developments. The Bank of Japan raised its short-term policy interest rate by 0.25 percentage points to 1.25%, but market assessments suggest that a loose financial environment will persist, leading to an increase in the dollar-yen exchange rate. The yen's weakness has contributed to the rise in the won-dollar exchange rate based on its correlation with other East Asian currencies.
As the won-dollar exchange rate rises, increasing domestic economic burdens such as rising import prices have prompted foreign exchange authorities to formulate responses. The Ministry of Economy and Finance and the Bank of Korea view the imbalance in foreign exchange supply and demand as a major cause of increased exchange rate volatility and are prioritizing measures to stabilize supply and demand.
Authorities are reviewing and considering extending the limits and maturities of currency swap agreements with major pension funds and public institutions to secure liquidity in the foreign exchange market. This aims to disperse the concentrated demand for dollars in the foreign exchange market and manage market liquidity.
Simultaneously, they are exploring financial and tax incentives to ensure that major exporting companies, such as shipbuilders, can smoothly supply their dollar-denominated sales to the market. The goal is to encourage companies to sell their held dollars to expand supply in the market.
Foreign exchange authorities are maintaining a readiness to intervene through verbal interventions and, if necessary, through smoothing operations to address market imbalances or speculative trading. They have activated a system to monitor the trends of won transactions in the offshore market and the inflow and outflow of foreign investment funds 24/7, planning to respond immediately to any signs of abnormality.
Market opinions are divided on the outlook for the exchange rate, with some suggesting that the upper limit could reach the low 1400s by year-end, while others believe further increases will be limited. Some analysts predict that the Fed's sustained high interest rate policy and high oil prices will continue to exert upward pressure on the dollar. Ongoing overseas investment demand from domestic investors is also seen as a factor that could restrict the won's value. Conversely, expectations that strong export performance in the semiconductor sector and a large current account surplus will limit the upper range of the exchange rate have also been raised.
* This article has been translated by AI.
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