Korea: Korean won depreciates
September 17, 2015
In September, the Korean won (KRW) continued to weaken against the U.S. dollar, prolonging the depreciating trend that has been in place since May. On 7 September, the currency traded at KRW 1,204 per USD, which was the weakest value since May 2010. The reading was 3.1% weaker than the level observed on the same day of the previous month and 17.5% weaker than the level in the same month last year.
The depreciation of the won largely reflects increasing demand for U.S. dollars resulting from a looming interest rate hike by the U.S. Federal Reserve, the devaluation of the yuan and turmoil in emerging markets. Moreover, on the domestic front, record-low interest rates triggered some capital flight as investors seek higher-yielding assets. Concerns over weakness in Korea’s exports add to pressures on the currency. Nevertheless, in the days after 7 September, the won appreciated slightly and reached 1,176 KRW per USD on 17 September on expectations that the Fed might delay its potential interest rate hike, which it did end up doing.
Tieying Ma, Economist at DBS, commented that:
“There is little reason to worry about capital flight, disorderly currency depreciation and the resultant liquidity strains. Unlike 1997 and 2008, the country's external asset position is strong enough to cover present external debt. The current account balance has also swung from deficit to surplus. Capital outflows now mainly come from outward investment by domestic financial institutions, the pace and the size of which are moderate and tolerable. Fundamentals remain sound, which should underpin the strength of the KRW in the medium- to long-term.”
Author: Carl Kelly, Economist