THE KOREA ECONOMIC DAILY, GLOBAL EDITION

The South Korean currency fell to its lowest level against the US dollar in 15 years in the second quarter amid growing uncertainties surrounding global foreign exchange markets given incohesive rate moves by major economies despite still-high US rates, which have kept the dollar strong and complicated rate decisions for Asia’s No. 4 economy.

According to data from the Bank of Korea on Sunday, the dollar/won averaged 1,371.24 in the second quarter, up 42 from the previous quarter and 56 from the same period of last year.

It marked the weakest quarterly average value for the Korean currency since the first quarter of 2009 when the won averaged 1,418.30 per dollar.

It is even weaker than the dollar/won level of 1,364.30 recorded in the fourth quarter of 2008 in the aftermath of the global financial meltdown and 1,357.20 in the fourth quarter of 2022 in the wake of the COVID-19 pandemic.

The Korean currency’s sharp depreciation to 1,400 per dollar comes without any major global or local financial upset or major catastrophic event, which is considered rare.

HIGH FX VOLATILITY  

The won’s fall continued despite the upward revision in the Korean economic outlook and heavy inflows of dollars into Asia’s fourth-largest economy given the country’s brisk second-quarter exports.

In line with the won’s sharp devaluation, the volatility in the dollar/won rate has increased in the past six months.

The won, which opened this year at 1,288 per dollar, weakened to 1,376.70 at the end of June, a 7% fall.

This is smaller than the Japanese yen’s 14.2% drop against the greenback over the same period, but a bigger devaluation than other major currencies’ depreciation – down 3.0%, 2.4% and 0.6% for the euro, renminbi and British pound sterling, respectively.

Economists attributed the Korean currency’s weak performance to the wide interest rate gap between Korea and the US.

In the absence of any event risking the economy, the biggest factor affecting the foreign exchange rate move is the gap between countries’ real interest rates, said Ahn Dong-hyun, a professor at the Department of Economics at Seoul National University.

“The Bank of Korea should take account of the growing volatility in the foreign exchange market caused by the US-Korea interest rate gap when making a monetary policy decision, such as a rate cut, in the future,” added Ahn.

The Korean central bank left its policy interest rate unchanged at 3.50% in a unanimous decision for the 11th straight meeting, as widely expected in May.

BOK Governor Rhee Chang-yong said after the rate decision that the central bank grew more uncertain about the timing of a rate cut,  mainly due to growing upside risks to inflation.

The weaker won would further complicate its move to cut rates due to the already wider gap in real interest rates.

WIDER YIELD SPREAD BETWEEN THE US AND KOREA

According to the BOK data, the yields on Korea’s 10-year government bonds recorded 3.227% on Friday, 111.2 basis points (bps) lower than those on 10-year US Treasury notes. The yield spread between the two countries’ government bonds, a barometer of real interest rate differences, widened by 50 bps from the end of last year.

Over the same period, the won lost more than 100 to hit 1,390.6 per dollar from 1,288.

The real interest rates oscillate based on countries’ different fiscal and monetary policies.

The US greenback has been on a tear thanks to the resilient world’s No. 1 economy even in a high interest rate environment.

In October of last year, the yields on 10-year US Treasury notes shot up to the highest level of 4.81% since the 2008-09 global financial crisis in anticipation that the US Federal Reserve might keep the policy rate high longer than expected following the release of a slew of strong macro data from the US suggesting its fired-up economy. On the same day, Asian stock markets and currencies tanked.

But that did not last long. A month later, the US released somewhat lackluster payroll data, leading the Korean won to immediately strengthen against the dollar.

The US stock and bond markets have been seesawing heavily depending on the Fed’s signals on rate moves since last year.

UNCERTAINTIES IN OTHER PARTS OF THE WORLD

Worse yet, the volatility in the foreign exchange market has grown further this year as major economies rushed to cut rates to shore up their economies after years of keeping their interest rates high.

A series of surprise domino rate cuts by the Swiss National Bank, Sveriges Riksbank, the European Central Bank and the Bank of Canada have further dragged down their currency value, making the US dollar more attractive, said Moon Da-woon, a researcher at Korea Investment & Securities Co.

Japan’s monetary policy adds to the FX market volatility as Asia’s second-largest economy hesitates to end its unconventional quantitative and qualitative easing measures, contrary to expectations.

This has led the Japanese yen to weaken to 161 per dollar on Friday versus 141 at the end of last year.

The FX market volatility is projected to increase further due to growing speculative bets on the weaker yen against the greenback.

Since the Fed started tightening in 2022, Asian currencies have been moving more in tandem. The Korean won’s correlation with the yen has also risen significantly.

“Despite the growing risk in Europe, the yen’s discount has deepened, suggesting the Japanese yen might have lost its value as a safe-haven asset,” said Lee Jung-hoon, an economist at Eugene Investment Co.

Write to Dong-Wook Jwa at leftking@hankyung.com

Sookyung Seo edited this article.