Won tests recent lows ahead of Yellen's visit to Korea

Finance

Published: 12 Jul. 2022, 16:41 Updated: 03 Aug. 2022, 10:08

Won tests recent lows ahead of Yellen's visit to Korea

An electronic display board, right, shows the won against the dollar at a dealing room in Hana Bank in central Seoul on Tuesday. [NEWS1]

The won continued its rapid retreat as investors rushed to safer havens and higher yields.

Without a swaps agreement in place with the United States and with the speed of rate increases limited by high levels of debt and a teetering housing market, Korea may be defending the won with the use of foreign reserves, putting into place the conditions for further declines and breakdown of confidence.

The value of the won has been declining steadily against the dollar this year following the start of Russia-Ukraine war in February. After touching 1,300 won for the first time in 13 years on June 23, the won continued to punch through that range through this month.

It has dropped 14 percent in value over the past year and traded at 1,312.10 won Tuesday, back at a 13-year low.

"The dollar will likely stay strong through the third quarter due to differences between monetary policies of the U.S. Fed and the central banks of other regions, including Europe's ECB," said Chun Kyu-yeon an economist at Hana Financial Investment. Jeon said won may fall to as low as 1,350 won per dollar, but projected the currency to gradually regain value after September.

The ECB announced last month the intention to raise its deposit rate by a quarter percentage point to minus 0.25 percent on July 21. The ECB's rate has stood at minus 0.5 percent and has been in negative territory since 2014.

Korea reported a trade deficit for three consecutive months through June and may report another deficit in July.

The trade account this month was a negative $5.53 billion through July 10, according to Statistics Korea. The last time Korea reported a trade deficit for four consecutive months was from June through September in 2008, the year of the global financial crisis.

"Considering the dollar further strengthens at times of recession, the value of won may fall additionally in the year-end through early next year," said Kim Hyo-jin, a researcher at KB Securities. "Not just the external environment, but the chance of Korea's trade deficit may grow is also an unfavorable element for the won."

The Korea International Trade Association (KITA) projected Korea to register a $3.3 billion trade deficit in the second half.

"Currently, demand for safer assets and the possibility of the Fed's rate increase are strengthening the dollar, but the value of the won may increase in the second half," said Chang Sang-sik, a spokesperson for KITA. "The trade deficit will fall as imports decline from the stabilization of raw material prices, and inflation, which will fall after reaching the peak, will reduce the chance of rate increases."

Korea's foreign reserves totaled 438.28 billion won at the end of June from 9.43 billion won in the previous month. It was the steepest decrease since November 2008.

Intervention in the currency markets is reported on a quarterly basis one quarter delayed, but a fall in foreign reserves might be a consequence of selling dollars to buy won in defense of the currency.

In a statement released on July 5th, the central bank suggested that it is using foreign reserves to ease currency volatility — without explicitly mentioning intervention — adding that it has enough reserves to respond to external shocks.

Korea had a currency swap deal with the United States from March 2020 to the last day of 2021. A new arrangement was a possible agenda item when U.S. President Joe Biden visited Korea in May, but the Korean government said it was not the right time as fundamentals were strong.

U.S. Treasury Secretary Janet Yellen will be visiting Korea on July 19 and 20. She will be meeting with Korean Finance Minister Choo Kyung-ho and discussing economic cooperation, though a swaps agreement has not been explicitly mentioned as a topic for the discussions.

BY JIN MIN-JI, KIM KYUNG-JIN [jin.minji@joongang.co.kr]