Exchange Rate Hits New High of 1,456 Won... "Concerns Over Prolonged Political Risks"

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The won-dollar exchange rate hit a new annual high again on the 24th. It is analyzed that the exchange rate rose as the dollar strengthened amid ongoing domestic political uncertainty. The Bank of Korea stated in its Financial Stability Report that "attention should be paid to external risks due to the rise in exchange rates and increased volatility when interest rates are lowered."

On this day, the won-dollar exchange rate in the Seoul foreign exchange market (as of 3:30 PM) closed the weekly trading at 1,456.40 won, up 4.40 won. The exchange rate, which hit a new annual high of 1,452 won per dollar the previous day, rose again today. At one point during the day, it rose to the 1,457 won range per dollar.

The rise in the exchange rate was largely influenced by the strong dollar. The Dollar Index, which represents the value of the dollar against the currencies of six major countries, rose from the mid-107s the previous day to the early 108s today. This is due to the retreat of expectations for a U.S. interest rate cut. Concerns that domestic political uncertainty will be prolonged, as the Democratic Party of Korea pushes for the impeachment of Acting President Han Duck-soo, are also believed to have contributed to the rise in the exchange rate.

The Bank of Korea expressed concerns about the exchange rate situation in its Financial Stability Report. It emphasized the need to be cautious about the potential expansion of external sector risks in a situation where interest rates are being lowered. The Bank of Korea analyzed that "the direction and magnitude of exchange rate fluctuations are affected not only by Korea's interest rate adjustments but also by the interest rate gap with the U.S.," and that "exchange rate volatility may increase due to differences in the pace of monetary easing between the Bank of Korea and the U.S. Federal Reserve (Fed)."

Jang Jeong-su, Director of the Bank of Korea's Financial Stability Department, explained, "When exchange rates fluctuate sharply, they can have a significant impact on financial companies, so we are prepared to respond through smoothing operations," adding, "Given the high level of uncertainty, the foreign exchange authorities will closely monitor the impact on the soundness of financial companies with caution."

The Bank of Korea believes that the current exchange rate is not at a level that negatively affects the soundness of financial companies. This is because domestic banks hold foreign currency assets and liabilities in similar amounts. Lee Jong-ryeol, Deputy Governor of the Bank of Korea, stated, "Considering the financial companies' capacity to respond and the financial authorities' response measures in the current situation, we judge that the high exchange rate does not have a significant impact on financial companies," adding, "The recently announced foreign exchange supply and demand improvement measures may also have a positive effect on the market."

Kang Jin-kyu, Reporter josep@hankyung.com