{"id":2199790,"date":"2022-12-28T11:14:56","date_gmt":"2022-12-28T11:14:56","guid":{"rendered":"https:\/\/www.nknews.org\/koreapro\/?p=2199790"},"modified":"2023-04-05T16:10:28","modified_gmt":"2023-04-05T07:10:28","slug":"why-south-koreas-won-currency-had-such-a-volatile-year","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/12\/why-south-koreas-won-currency-had-such-a-volatile-year\/","title":{"rendered":"Why South Korea’s currency had such a volatile year"},"content":{"rendered":"

The South Korean won (KRW) came under significant pressure on international foreign exchange markets this year, declining by <\/span>almost 10%<\/span><\/a> against the U.S. dollar since the start of January alone. At one point, the greenback was up over <\/span>20%<\/span><\/a> against the South Korean currency.<\/span><\/p>\n

Yet while the won was one of the world\u2019s worst-performing currencies in the first three quarters, it has <\/span>bounced back<\/span><\/a> from a 13-year low towards the end of 2022 to post the best fourth-quarter currency performance in Asia. Central bank officials, politicians, business leaders and others have had to navigate this volatility.<\/span><\/p>\n

Several factors explain these dramatic movements, from the South Korean economy\u2019s strong links to China to the influence of the U.S. Federal Reserve\u2019s rate increases. And while these trends point to further improvements in the won in 2023, they also underline the risks that trading in the won will continue to carry.<\/span><\/p>\n

CANARY IN THE DRAGON\u2019S DEN<\/b><\/p>\n

The first point is that KRW often trades as a proxy for the Chinese yuan, or renminbi. The renminbi is <\/span>not freely tradeable<\/span><\/a> due to China\u2019s stringent currency controls, and at one point, the U.S. Treasury Department designated China as a <\/span>currency manipulator<\/span><\/a>. Moreover, South Korea is highly dependent on the Chinese economy and, <\/span>until recently<\/span><\/a>, ran a substantial trade surplus with Beijing.\u00a0<\/span><\/p>\n

These two factors mean investors often perceive the health of the South Korean economy as a good indicator of China\u2019s economic health.<\/span><\/p>\n

Unfortunately for both countries, China\u2019s <\/span>poor economic performance<\/span><\/a> this year due to its <\/span>\u201czero Covid\u201d strategy<\/span><\/a>, political <\/span>instability<\/span><\/a> and the <\/span>collapse<\/span><\/a> of its vast property sector could be factors in the ROK\u2019s troubles.<\/span><\/p>\n

Edward Howell, a lecturer in South Korean politics at the University of Oxford, told<\/span> Korea Pro <\/span><\/i>that \u201cthe falling value of the KRW can be attributed \u2014 at least in part \u2014 to risk aversion and concerns given China\u2019s draconian zero-Covid policy.\u201d<\/span><\/p>\n

Howell added that as Beijing eases that policy, the prospects for the won and South Korean business may improve in 2023.<\/span><\/p>\n

\u201cMore broadly, it must be remembered that China is South Korea\u2019s largest trade partner by a considerable margin, and the recent trade deficit highlights the need to rethink this relationship,\u201d he said.<\/span><\/p>\n

\"\"

New York Stock Exchange, March 2022, via\u00a0Wikimedia Commons<\/a><\/p><\/div>\n

WHEN THE FED SNEEZES<\/b><\/p>\n

South Korea also remains highly exposed to U.S. economic trends and, in particular, the decisions of the Federal Reserve. While South Korea\u2019s inflation rate remains at a relatively <\/span>modest level<\/span><\/a> of about 5%, rising prices in the U.S. and globally have prompted the Fed to hike rates <\/span>aggressively<\/span><\/a>, which put the Bank of Korea (BOK) in a challenging position.<\/span><\/p>\n

BOK officials were <\/span>reluctant<\/span><\/a> to raise rates because doing so would put further pressure on the high number of citizens with <\/span>large mortgages<\/span><\/a> and eat into their disposable income. Yet not raising rates in line with the Fed \u2014 and preferably going further \u2014 would have risked <\/span>a run<\/span><\/a> on the KRW.<\/span><\/p>\n

Traders would have lacked the incentive to hold KRW if they could gain better yields from holding greenbacks, especially when the dollar is one of the safest financial assets in the world. Further, a run on the KRW would have risked further inflation and contributed to a potentially sharp decline in living standards.<\/span><\/p>\n

The BOK moved <\/span>quickly<\/span><\/a> to protect the won from these movements \u2014 and largely succeeded in doing so. Indeed, higher interest rates may explain why KRW has strengthened from its lows. But the episode demonstrated the South Korean currency’s vulnerability to external economic factors outside its control.<\/span><\/p>\n

TUMULTUOUS MARKETS<\/b><\/p>\n

Seoul also had to overcome many domestic challenges this year. This includes worsening relations with North Korea, which has stepped up its <\/span>aggressive maneuvers<\/span><\/a>, aggravating tensions on the Korean Peninsula.<\/span><\/p>\n

South Korea, famed as an exporting powerhouse, has seen <\/span>sharp plunges<\/span><\/a> in its exporting figures \u2014 and is now running a <\/span>trade deficit<\/span><\/a>. Hikes in the <\/span>industrial price<\/span><\/a> of energy and electricity have put further pressure on South Korean industries and, ultimately, its currency. Thus, unstable economic conditions at home and a trickier international scene have conspired to prompt considerable volatility in the KRW.<\/span><\/p>\n

Of course, a weakening currency is not without benefits. A weaker currency makes local assets cheaper for foreign investors. As <\/span>Korea Pro<\/span><\/i><\/a> has pointed out, a weaker won has made South Korean banks considerably undervalued. Exports have become more affordable in dollar terms and more attractive in international markets.<\/span><\/p>\n

However, BOK officials are likely to be highly concerned about the volatility the KRW has experienced this year. Foreign investors will be less likely to invest in Korean companies or assets if they believe doing so will overexpose them to detrimental foreign exchange movements.<\/span><\/p>\n

Holding assets priced in KRW, such as stocks listed on the KOSPI or other South Korean financial markets, inevitably exposes traders and investors to the fortunes of the country\u2019s currency. And the Korean market, which is highly dependent on exports, has <\/span>risks<\/span><\/a>. A stable, predictable currency is highly preferable for this reason.<\/span><\/p>\n

VOLATILITY<\/b><\/p>\n

Although there is a <\/span>lack<\/span><\/a> of <\/span>consensus<\/span><\/a> among experts as to when the Federal Reserve will start to ease interest rates, that does appear to be the <\/span>direction<\/span><\/a> that it will take. The Fed\u2019s eventual turnaround should give the Bank of Korea breathing room and, in turn, provide the KRW with sufficient space to make further gains against the dollar.\u00a0<\/span><\/p>\n

Beijing also appears prepared <\/span>to open up<\/span><\/a> China\u2019s economy to a greater extent. Positive developments in China would likely spill over into benefits for South Korea.<\/span><\/p>\n

What is certain is that the KRW remains highly exposed to international factors. This makes the fate of the South Korean currency harder to predict. While central bankers will want to create a more resilient and independent national currency going forward, volatility will be a hallmark of trading the KRW for the foreseeable future.<\/span><\/p>\n

Edited by John Lee<\/span><\/i><\/p>\n

Business & Economy<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"

The South Korean won (KRW) came under significant pressure on international foreign exchange markets this year, declining by almost 10% against the U.S. dollar since the start of January alone. At one point, the greenback was up over 20% against the South Korean currency. Yet while the won was one of the world\u2019s worst-performing currencies […]<\/p>\n","protected":false},"author":10407,"featured_media":2199791,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[24],"class_list":["post-2199790","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-business-economy"],"yoast_head":"\nWhy South Korea's currency had such a volatile year - KOREA PRO<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2022\/12\/why-south-koreas-won-currency-had-such-a-volatile-year\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why South Korea's currency had such a volatile year - KOREA PRO\" \/>\n<meta property=\"og:description\" content=\"The South Korean won (KRW) came under significant pressure on international foreign exchange markets this year, declining by almost 10% against the U.S. dollar since the start of January alone. 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