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Foreign exchange

Why Korean won lacks luster, despite dollar’s weak trend

By Aug 03, 2020 (Gmt+09:00)

2 Min read

The South Korean won has been stuck in a range between 1,190 and 1,210 to the US dollar in the past two months, down 3% since the start of the year, despite the dollar’s overall weakness against major currencies such as the euro, yen and pound.

A plunge in exports, foreign investors’ selling in Seoul stock markets and growing appetite for safe assets were behind the rangebound movement in the dollar/won rate, coupled with coronavirus-triggered economic uncertainties.

The won ended at 1,193.4 per dollar on August 3, compared with the July 31 closing of 1,191.0. It has hardly broken below the 1,180 barrier for several months, based on the closing rate.

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The dollar has turned south since the US Federal Reserve signed currency swap deals on March 19 with nine additional countries, including South Korea, to allow them to access a combined total of $450 billion.

The US Dollar Index was quoted at 93.4 on August 3, down 9.8% from its high of 103.6 touched on March 19. The index fell 4.1% in July alone, marking its biggest monthly drop since the 5.4% decline in September 2010.

Against the euro, the US dollar has shed 10.1% from its high so far this year. The euro closed at $1.178 on July 31.

In comparison, the won rebounded by 7% from its intraday low of 1,285.7 hit on March 19.

“The dollar’s decline reflects growing investment demand for risky assets amid expectations for Covid-19 vaccines,” said Samsung Futures research head Miyoung Jung. “Sluggish US economic data, including employment, in the wake of the spreading coronavirus, was also attributed to the dollar’s weakness.”

South Korea’s exports dropped by 10.6% year-on-year to $283.5 billion during the first half of the year. Its second-quarter exports plummeted by 16.6%, marking the worst shipments in 56 years.

Adding to the exports plunge, both companies and households opted to hold dollars, instead of exchanging them into the won.

Dollar deposit accounts by Korean companies increased by $2.33 billion to a record $58 billion at the end of June, from a month before. The balance of individuals’ dollar savings accounts stood at $15.5 billion at the end of June. It posted a month-on-month increase of $1.21 billion in its fourth consecutive month of growth.

Foreign investors had offloaded a net 25 trillion won ($21 billion) worth of shares on the Korea Stock Exchange between February and June. Last month, foreign investors made a comeback to the Korean stock markets for the first time in seven months, buying a net 895.5 billion won of domestic shares.

For outbound investment, Korean investors scooped up a net $70.9 billion worth of overseas shares in the first half of this year, nearly three times as much as their net purchases of global shares made a year earlier, according to the Korea Securities Depository.

Despite the prospect of a weaker dollar, the won is unlikely to stage a strong rebound as the exports outlook remains bleak.

“The pace of exports recovery is slowing and foreign investors’ buying of Korean shares is not big enough,” said HI Investment & Securities analyst Sang-hyun Park. “The dollar/won rate will likely hover between 1,170 and 1,230 until November when the US presidential election will take place.”

Write to Ikhwan Kim at lovepen@hankyung.com

Yeonhee Kim edited this article

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