[Edaily Reporter Kim Kook Bae ] In the third quarter of this year, the value of the Korean won rose nearly three times as much as the Japanese yen, recording the highest rate of appreciation among the currencies of the Group of 20 (G20) nations. The won’s strength was driven by dollar sales by semiconductor exporters and a narrowing of the interest rate differential between South Korea and the United States. However, with international oil prices surpassing $100 per barrel and U.S. inflation and Treasury yields on the rise, the sharp decline in the exchange rate is facing its first test.

According to the Seoul foreign exchange market on the 13th, the won-dollar exchange rate closed at 1,344.1 won last week. This represents a decline of 6.0 won from a week earlier and 207.1 won compared to July 1 (1,551.2 won).

Since the start of the third quarter through the 11th, the won has appreciated by 15.41%, ranking first among G20 currencies. This is roughly three times the rate of the Japanese yen (5.84%), which ranked second. The Australian dollar and Canadian dollar rose by 4.00% and 2.48%, respectively, while the euro rose by only 1.93%. Considering that the U.S. Dollar Index—which measures the dollar’s value against the currencies of six major economies—fell by 0.02% over the same period, effectively remaining flat, the won’s strength stood out particularly.

In July and August, the won’s strength was driven by a narrowing of the Korea-U.S. interest rate differential following the Bank of Korea’s benchmark rate hike, amid easing concerns over U.S. monetary tightening. A slowdown in net selling of domestic stocks by foreign investors and expectations of dollar inflows following the listing of SK Hynix’s American Depositary Receipts (ADRs) also contributed to this trend. In particular, pressure on the exchange rate to decline intensified as semiconductor exporters released dollars received from export proceeds into the market.

However, when taking into account differences in the currencies and inflation rates of trading partners, the won has not actually strengthened by as much as the recent decline in the exchange rate would suggest. According to the Bank for International Settlements (BIS), the nominal effective exchange rate—which comprehensively measures the won’s value against the currencies of major trading partners—stood at 90.1 on August 26, 11.1% lower than the 2019 average (101.32). The real effective exchange rate, which accounts for price differences, also stood at 85.50 in July, 16.4% lower than the 2019 average. Although the won-dollar exchange rate fell by more than 200 won in just over two months, it has not fully reversed the cumulative weakening of the won that has occurred since the pandemic.

The issue lies in the pace of the decline. The average exchange rate fluctuation during the third quarter was 67.8 won, approaching the level seen during the global financial crisis in 2008 (68.3 won) and exceeding the level in 2009 (61.2 won). Increased exchange rate volatility makes it difficult for companies to set import and export prices and formulate currency hedging strategies. A sharp appreciation of the won could also weigh on corporate earnings by reducing the won-denominated value of export proceeds earned in dollars.

In the short term, there is a possibility that the exchange rate could rebound. This is because West Texas Intermediate (WTI) and Brent crude oil prices have surpassed $100 per barrel amid instability in the Middle East, while U.S. inflation and Treasury yields are also rising. The market is closely watching the U.S. Federal Reserve’s (Fed) interest rate decision scheduled for the 15th and 16th. If the Fed raises its benchmark interest rate, the interest rate differential between South Korea and the U.S.—based on the upper limits of their respective rates—will widen from 0.75 percentage points to 1 percentage point. The wider the interest rate differential between the two countries, the greater the likelihood that the won will weaken.

Lee Min-hyuk, an economist at KB Kookmin Bank, predicted, “Triggered by a U.S. interest rate hike, the excessive one-sided strength of the won may reverse somewhat, causing the exchange rate to rebound to the 1,360–1,370 won range.” On the other hand, Seo Jeong-hoon, a senior research fellow at Hana Bank, said, “A gradual strengthening of the won will continue through the end of the year,” adding, “We must also keep in mind the possibility that the exchange rate could fall to around 1,310 won.” The market is placing more weight on the possibility that the pace of the recent sharp correction will slow rather than the exchange rate reversing its downward trend.