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BOK chief predicts Korean won stabilisation if Middle East conflict eases

ANN/THE KOREA HERALD – Bank of Korea Governor Rhee Chang-yong during a visit to the United States (US) suggested the won-dollar exchange rate could stabilise if tensions in the Middle East subside.

The exchange rate has been volatile lately due to high demand for the dollar, driven by expectations of aggressive monetary tightening by the US Federal Reserve amid higher-than-expected inflation. The conflict has further boosted demand for the dollar as a safe-haven currency, leading to the depreciation of the Korean won.

“If the war does not further expand, there will not be much difficulties in managing the exchange rate,” Rhee said in a press conference held in Washington on Friday. The event was held on the sidelines of the International Monetary Fund and Group of 20 finance leaders’ spring meetings.

“The exchange rate would stabilise as long as oil prices do not surge or incidents such as the shutdown of the Strait of Hormuz do not occur,” Rhee said.

Though the won devaluation lost full steam after the won plunged to its lowest at KRW1,400 against the dollar tomorrow, the currency lost its value on Friday after Israel’s missile attack on Iran.

The local currency closed against the greenback at KRW1,382.2 on Friday, losing its value by KRW9.3 from the previous trading day. But overall, Rhee viewed the fluctuation of the won-dollar exchange rate has passed its peak.

Bank of Korea Governor Rhee Chang-yong. PHOTO: THE KOREA HERALD

“The exchange rate has begun to stabilise after we shared a consensus on the excessive depreciation of the won through trilateral talks held by Korea, the US and Japan,” he said, referring to the three-way talks held by finance chiefs of the three nations on Wednesday.

As Rhee said, the won-dollar currency rate closed at KRW1,372.9 on Thursday, before stumbling off the next day.

“For countries like Korea, which heavily consume oil, the uncertainty is grave regarding the state of the Middle East,” Rhee said. “Fortunately, the consensus is that the war will not further expand. We will have to watch how it rolls out.”

With the heavy fluctuation of the won-dollar exchange rate, the won’s value deprecated by over seven per cent in nearly four months, compared to how the rate stood in the KRW1,280 range in late December.

The devaluation is sharper than the 6.9-per-cent and 5.8-per-cent depreciation in the same periods of 2008 and 2009, when Korea was impacted by the global financial crisis.

Though the volatility in the exchange rate is caused mainly by the strong dollar, the depreciation of the Korean won is also a factor.

The US dollar index, a metric of the dollar value against major six peers such as the euro, pound and yen, rose 4.9 per cent this year, outweighing the 7.3-per-cent devaluation of the won against the dollar.

The figures show the Korean won has lost its own value.

The won’s devaluation partly results from the depreciation of the Chinese yuan and Japanese yen, as the won works as a proxy for the two currencies.

“The upper band of the won-dollar exchange rate has been confirmed when it reached its peak at KRW1,400, as Korea, the US and Japan engaged in policy cooperation,” Daishin Securities Economist Lee Joo-won said.