Geopolitical Tensions Fuel Dollar Surge, Korean Won Plummets

The won-dollar exchange rate has surged over 7% this year, surpassing the increase seen during the 2008 Global Financial Crisis and the International Monetary Fund (IMF) currency crisis.

As of May 19th, the won-dollar exchange rate in the Seoul foreign exchange market was confirmed to have closed at KRW 1,382, a 7.3% increase from the end-of-year price of KRW 1,288 last year.

It is shocking that for the first time since the introduction of the market average exchange rate system in March 1990 (free-floating exchange rate system in December 1997), the exchange rate has surged over 7% between January and April.

During the financial crisis in 2008 and 2009, the same period saw increases of 6.9% and 5.8%, respectively. In 1997, when the foreign exchange crisis occurred, the exchange rate rose around 6% from January to April. The surge of over 7% this time indicates increasing market anxiety.

Initially, the rise in the won-dollar exchange rate was reported to be influenced by the strong dollar. The dollar index, an indicator showing the value of the dollar, rose 4.8% over the same period.

The strong dollar, which has significantly affected the won-dollar exchange rate, appears to have occurred as expectations for a delay in the Federal Reserve’s interest rate cut have strengthened amid the continued boom in the U.S. economy.

In addition, overlapping geopolitical risks such as the Russia-Ukraine war, the Israel-Palestine armed conflict, and the Israel-Iran confrontation are believed to be stimulating demand for the dollar, a safe asset.

Even considering the geopolitical crisis engulfing the global economic market, the fall in the value of the Korean won is higher than in major countries.

Among the 26 major trading countries of the Federal Reserve, the decline in the value of Korea’s currency ranked 20th. Countries with a greater currency value decline than Korea include Chile (10.0%), Japan (9.8%), Sweden (9.0%), Switzerland (8.5%), Brazil (8.1%), and Argentina (7.6%).

The Bank of Korea intervened in the foreign exchange market throughout the third week of April. Bank of Korea Governor Rhee Chang Yong was reported to have said, “The exchange rate depends on how the geopolitical tensions in the Middle East unfold.”

Had the Bank of Korea not intervened, it is speculated that the won-dollar exchange rate would have recorded a larger drop.

Although it barely ranked 20th, Korea’s level is merely above the bottom. So, why has the value of the Korean won fallen more than in other countries with similar economic conditions?

The current geopolitical crisis in the Middle East is not historically at the highest level, but it is certainly the most severe in recent years. The impact of the Middle East’s geopolitical crisis on the Korean economy is projected to be at a short-term level within a year.

According to the GPR index, which represents the world’s geopolitical crisis, the current crisis level is high at 104.60 as of the 3rd. However, it did not reach the level of 127.4 like in April 2022, which was immediately after Russia attacked Ukraine.

Also, while the volatility of the financial market is at its highest, it is known to be lower than the U.S. bear market last October. Accordingly, the stock volatility index, VIX, was also confirmed to be lower at 18.71 as of May 22, compared to 21.27 last October.

As mentioned earlier, most indices related to geopolitical crises, such as GPR and VIX, have increased, but they are not at their highest levels, or their fluctuations are large in the short term but do not move significantly in the long term.

In other words, this means that the specificity of the market was reflected more than the geopolitical crisis in the rise of the won-dollar exchange rate.

In South Korea, the high proportion of manufacturing, openness to the outside world, proportion of non-regular workers, and aging rate make it vulnerable to external shocks, so it is immediately affected by geopolitical crises. On the contrary, they disappear relatively quickly.

Meanwhile, it has been reported that there is bad news that awaits and will make the won-dollar exchange rate rise without falling.

Recently, the dividend payment schedules of major domestic listed companies have been concentrated, which is speculated to affect the rise of the won-dollar exchange rate.

Samsung Electronics, Hyundai Motor, Samsung Fire & Marine Insurance, Samsung Electronics Preferred Stock, and DB Insurance began paying dividends to foreign shareholders on May 19, and LG Chem announced plans to pay dividends on May 23.

Following this, SK Hynix on May 24, IBK Industrial Bank on May 25, and KT on May 26 have dividend payments planned. A securities industry official said that once the dividend payment plan is finalized, the demand for remittance will decrease and the won-dollar exchange rate can return to its place.