[Edaily Reporter Lee Jeong-yoon ] Since the start of the second half of the year, the won-dollar exchange rate has fallen by more than 200 won, settling in the 1,300-won range, and the won’s real value is also recovering rapidly. The real effective exchange rate, which reflects the won’s real value, has risen for three consecutive months, suggesting that the currency’s previous undervaluation has been largely resolved.

As the won continues to strengthen rapidly, attention is turning to how much further the exchange rate might fall. Experts are highlighting the possibility that the exchange rate could drop to the 1,200 won range next year, driven by a boom in semiconductor exports and a large current account surplus.

◇ Won 9% Below Long-Term Average… 0.8% Difference from 5-Year Average

As of 9:19 a.m. on the 2nd in the Seoul foreign exchange market, the exchange rate was trading at 1,334.5 won, up 0.2 won from the previous trading day (as of 3:30 p.m.). With the exchange rate recently hovering in the low 1,300-won range, attention is also focused on the extent to which the won’s value has recovered.

According to the Bank for International Settlements (BIS), the won’s real effective exchange rate stood at 92.73 in September, which is about 9.0% lower than the long-term average of 101.9 since 1994. It is also 8.2% lower than the average of 100.99 since 2000.

The real effective exchange rate is an indicator that reflects exchange rate and price differences with major trading partners, with the 2020 average set at 100. A higher index value indicates that the won’s real value has increased.

Shin Hyun-song, Governor of the Bank of Korea, also assessed during a press briefing following last month’s Monetary Policy Committee meeting that “based on the BIS effective exchange rate index, the average is around 101,” adding that “the won remains weak even by BIS effective exchange rate standards.” He explained that although the exchange rate has fallen rapidly recently, the value of the won relative to the currencies of major trading partners still remains below the historical average.

However, the degree to which the won is undervalued varies significantly depending on the time period used for comparison. The real effective exchange rate, which had fallen to 83.04 in June, rose for three consecutive months starting in July, reaching 92.73 in September. This represents an 11.7% increase over the three-month period and a 3.2% rise compared to the previous month (89.89).

In particular, when the comparison period is narrowed to the recent past, the gap relative to historical averages narrows further. While the average over the past 10 years is 98.5—5.9% higher than the September index—the average over the past five years is 93.5, resulting in a gap of only 0.8%. Although the won remains weak relative to the long-term average, the undervaluation has been largely resolved when viewed over the past five years.

◇How Far Will the Won Strengthen? … Forecasts Suggest It Could Enter the 1,200 Won Range Next Year

As the won’s real value recovers rapidly, there are growing efforts to gauge the potential for further depreciation based on the effective exchange rate. Experts are suggesting that the exchange rate could fall to around 1,250 won.

KB Kookmin Bank analyzed that applying the gap between September’s real effective exchange rate and the average since 2000 to the average exchange rate at that time yields a figure of approximately 1,248 won. Korea Investment & Securities also projected a range of 1,230 to 1,250 won based on the nominal effective exchange rate.

However, past averages do not necessarily indicate the current appropriate exchange rate. Some point out that, given changes in economic conditions—such as shifts in the trade structure and the expansion of overseas investment—it is difficult to determine the won’s fair value based solely on the real effective exchange rate.

Forecasts for next year’s exchange rate also suggest the possibility of the won entering the 1,200-won range. Lee Jeong-hoon, an analyst at Daishin Securities, predicted, “The trade surplus is so massive that it more than offsets the pressure from capital outflows,” adding, “Reflecting the strength of supply and demand and the expected weakness of the dollar in the first half of next year, the won will likely attempt to enter the 1,200-won range during that period.”

On the other hand, some analysts predict that the won’s strength will not last indefinitely. Kim Yu-mi, an economist at Kiwoom Securities, forecast that while the exchange rate may temporarily dip below 1,300 won early next year, it will rise again in the second half. Economist Kim predicted, “After corporate foreign exchange demand peaks in the first half, the exchange rate will rise again in the second half due to the expansion of structural overseas investments by pension funds and individual investors, as well as pressure from a dollar rebound.”