Help the won!

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Help the won!

Financial and foreign exchange markets in Korea shook Wednesday after U.S. consumer prices went higher than expected despite a decline in international oil prices. As the U.S. Federal Reserve is expected to continue with its monetary tightening policy to control inflation, U.S. stock prices dropped by the most Tuesday since June 2020. A glimmer of hope for a respite from persistent rate hikes also disappeared. The dollar was traded at 1,390.9 won in Korea’s foreign exchange market on Wednesday, a whopping 17.3-won drop from the previous day. The exchange rate is headed to 1,400 won per dollar.

The Fed will likely lift the benchmark rate by 0.75 to 1 percentage points next week. As the strong dollar will be stronger, the Bank of Korea will be more pressured to raise its interest rate than before. Given our enormous household debt of around 1,800 trillion won, the government cannot elevate the rate to U.S. levels.

The government underscored the difference between today and the 1997-98 foreign exchange crisis and the 2007-8 global financial crisis. In fact, Korea does not suffer a dollar drought as in the 1997 crisis — and the won is not the only currency whose value plunged. Yet we cannot lower our guard, given the nightmare of the foreign exchange crisis. Market analysts mostly anticipate a strong dollar at least until the first quarter of 2023 because of the Fed’s aggressive rake hikes.

A more fundamental reason for the strong dollar is the relatively good condition of the U.S. economy. The European Union faces an energy crisis after Russia’s invasion of Ukraine. The Japanese economy is in bad shape, while China is growing slowly due to the Covid-19 pandemic and a slump in its real estate market. No other currencies can replace the mighty dollar for a while.

The strong dollar will likely push the exchange rate to 1,400 won soon. Except for the two financial crises, Koreans did not experience such weak won. The central bank governor’s reassurance about its dollar reserve reminds us of the finance minister’s self-assurance about Korea’s “strong economic fundamentals” during the foreign exchange crisis.

After the won depreciated to 1,300 won per dollar in June, Finance Minister Choo Kyung-ho pledged to ease the imbalance between supply and demand through policy means. We hope he keeps his promise. The government also needs to increase its dollar supply to the exchange market by encouraging companies to export more. In particular, it must closely watch our institutional investors, including the National Pension Service, when they invest in foreign countries so that their investment cannot lead to a further drop in the won’s value.
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