▲Source = Mirae Asset Securities
The won-dollar exchange rate has broken through the psychological barrier of 1,270 won and is marching high. Along with the strengthening of the dollar, foreigners’ net selling of domestic stocks and trade deficits combine to increase the pressure on the won against the won. The problem is that it is difficult to find a downward momentum in the won-dollar exchange rate.
The day before, the won-dollar exchange rate closed at 1272.50 won in the Seoul foreign exchange market. The won-dollar exchange rate soared to 1,270 won for the first time in two years and one month since March 2020 (1,285.70 won), when the impact of the global financial market was great at the beginning of the spread of the novel coronavirus infection (COVID-19). However, on the 29th, it turned downward and fell below the 1,270 won level.
The steep rise in the won-dollar exchange rate is linked to the global trend of strengthening the dollar. The dollar index, which measures the value of the dollar against six major currencies, surpassed 103.4 points during the day before, the highest since January 2017.
Foreign investors’ net selling of domestic stocks is also a factor that increases the downward pressure on the won. According to the Korea Exchange on the 29th, foreign investors sold 10.738.9 billion won worth of sales this year.
The impact from China’s lockdown is also valid. It is analyzed that the yuan, which had been decoupling with the won, rapidly weakened from the end of this month, affecting the won-dollar exchange rate. According to NH Investment & Securities, the correlation coefficient between the won and the yuan since the beginning of the year was 0.89, showing the highest level.
To make matters worse, Korea’s trade deficit is also highly likely to depreciate the won. According to the Korea Customs Service, Korea’s exports from April 1 to 20 increased by 16.9% compared to the same period of the previous year. This is more than double the amount in the same period last year ($2.032 billion). If this trend continues, this month’s trade deficit is expected to record the largest monthly record.
Usually, when the exchange rate rises, the profits of exporting companies improve. The problem is that not only the won but also the yen and the yuan are weakening against the dollar, and it is predicted that the export effect will not be very large due to the sharp rise in raw material prices.
Companies with a lot of foreign currency debt are also burdened. In particular, losses for airlines that trade various expenses in foreign currencies could snowball. In the case of Korean Air, if the won depreciates by 10 won per dollar, it will incur a foreign currency valuation loss of about 45 billion won, and it is expected to incur a loss of about 19 billion won in terms of cash flow in the financial statements. As of the end of last year, the amount of dollar debt held by Korean Air reached 9.4497 trillion won.
Experts believe that the won-dollar exchange rate has entered a phase of short-term overshooting (temporary surge).
Jeon Gyu-yeon, a researcher at Hana Financial Investment, said, “Expectations for the pace of tightening by the Federal Reserve (Fed) will continue until the Federal Open Market Committee (FOMC) in May, which may lead to pressure on the won. As the trend continues, the upper end of the won-dollar exchange rate needs to remain open at the 1,300 won level.”
