SEOUL, November 28, 2023 — The Korean won’s recent slide against the dollar isn’t simply a reflection of broader market forces, according to analysis by former Bank of Korea monetary policy board member, Rhee Chang-yong. He argues the currency’s depreciation is disproportionate to the country’s underlying economic fundamentals, raising concerns about potential instability.
Won’s Weakness: More Than Meets the Eye?
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A former central bank official suggests the Korean won’s decline is exceeding what economic indicators would suggest.
- Rhee Chang-yong, a former Bank of korea official, believes the won is undervalued.
- He points to korea’s strong current account surplus as a counterweight to depreciation pressures.
- The won has experienced significant volatility against the U.S. dollar in recent months.
- Rhee suggests monitoring capital flows and potential intervention may be necessary.
The Korean won has been under pressure throughout 2023,losing ground against the U.S. dollar amid global economic uncertainty and rising interest rates in the United States. However, Rhee contends that the extent of the won’s depreciation isn’t justified when considering Korea’s robust economic position. The current account,for exmaple,remains in surplus,a factor that typically supports a currency’s value.
What factors are influencing the Korean won’s value? The won’s performance is being influenced by a complex interplay of global and domestic factors, including U.S. monetary policy, investor sentiment, and Korea’s trade balance.
Current Account Surplus Offers Support
Rhee highlighted Korea’s consistent current account surplus as a key factor that should be bolstering the won. A current account surplus indicates that a country is earning more from its exports than it is indeed spending on imports, creating demand for its currency. Despite this positive indicator,the won has continued to weaken,prompting Rhee to question whether other factors are at play.
Monitoring Capital Flows is Crucial
The former Bank of Korea official emphasized the importance of closely monitoring capital flows. Outflows of capital — money leaving the country — can put downward pressure on a currency. Rhee suggested that authorities should be vigilant in tracking these flows and be prepared to intervene if necessary to stabilize the won. He didn’t specify what form intervention might take, but options could include direct currency intervention or adjustments to monetary policy.
Volatility and Investor Sentiment
The won’s recent volatility reflects broader market anxieties about the global economic outlook. Rising interest rates in the U.S. have attracted capital to dollar-denominated assets, putting pressure on currencies in other countries, including Korea. Investor sentiment also plays a significant role, with concerns about a potential global recession contributing to risk aversion and a flight to safety.
