The South Korean won (KRW) exchange rate declined 0.4% against the US dollar (USD) on May 10, 2023, reaching 1,324.7 KRW per USD. This was the lowest level for the won since April 28, when it touched 1,326.2 KRW per USD. What caused this depreciation of the won and what are its implications for the Korean economy?
Factors Behind the Won’s Fall
There are several factors that contributed to the weakening of the won against the dollar on May 10. Some of them are:
The strength of the US dollar
The US dollar index, which measures the value of the dollar against a basket of six major currencies, rose 0.2% to 97.6 on May 10, reaching its highest level since April 26. The dollar was supported by strong US economic data, such as the better-than-expected nonfarm payrolls report for April and the higher-than-expected inflation rate for April. The dollar also benefited from the safe-haven demand amid rising geopolitical tensions between the US and Iran.
The weakness of the Korean economy
The Korean economy contracted by 0.3% in the first quarter of 2023, compared to a growth of 1% in the previous quarter. This was the first quarterly contraction since 2009 and was worse than the market expectation of a 0.1% decline. The main drag on the economy was the slump in exports, which fell by 2.6% in the first quarter, due to weak global demand and trade disputes with Japan and China. The domestic demand also remained subdued, as consumer spending and business investment both decreased in the first quarter.
The uncertainty over the US-China trade talks
The trade negotiations between the US and China, which are Korea’s two largest trading partners, faced a setback on May 10, as President Trump increased tariffs on $200 billion worth of Chinese goods from 10% to 25%, and threatened to impose tariffs on another $325 billion worth of Chinese goods. China vowed to retaliate with “necessary countermeasures” and said that it would not succumb to any pressure from the US. The escalation of trade tensions between the world’s two largest economies raised fears of a global slowdown and weighed on the sentiment of emerging market currencies, including the won.
Implications for the Korean Economy
The depreciation of the won against the dollar has both positive and negative effects on the Korean economy. On one hand, it makes Korean exports more competitive in global markets, which could help boost export growth and reduce the current account surplus. On the other hand, it increases the cost of imports and foreign debt payments, which could hurt consumer and business confidence and inflation expectations. Moreover, it could also trigger capital outflows from Korea, as foreign investors may seek higher returns elsewhere.
The Bank of Korea (BOK), which is Korea’s central bank, has been closely monitoring the movements of the won exchange rate and has intervened occasionally to smooth out excessive volatility. The BOK has also kept its policy rate unchanged at 1.75% since November 2022, despite mounting pressure to cut rates to stimulate growth and inflation. The BOK has said that it will maintain its accommodative monetary policy stance until it sees clear signs of economic recovery and inflation stabilization.
The outlook for the won exchange rate depends largely on how the US-China trade talks will evolve and how the global economic conditions will change. If the trade talks resume and reach a deal soon, and if the global growth prospects improve, then the won could appreciate against the dollar in the coming months. However, if the trade talks break down and lead to a full-blown trade war, and if the global growth outlook worsens, then the won could depreciate further against the dollar in the near future.
