The British pound has climbed past 2,000 won per pound, the first time in 16 years since Sept. 2009 during the financial crisis. The euro also broke through 1,747 won per euro, surging to its highest level in 16 years since Nov. 2009. Even though the foreign exchange authorities moved to expand dollar supply, the high-exchange-rate trend is expected to persist for the time being unless the structural supply-demand imbalance is resolved.
On the 23rd in the foreign exchange market, the won-pound rate rose intraday to 2,002 won per pound. The won-euro rate hovered around 1,747 won per euro, putting both currencies at their highest levels since 2009. The reference rate published by the European Central Bank (ECB) also supported the euro's strength at 1,738.72 won per euro as of the 22nd.
The euro traded around 1,505 won in January this year and jumped 16% in less than a year. The pound likewise traded in the 1,760 won range at the start of the year and surged 13.8%. The euro and pound are not showing particular strength in international markets at present. The analysis is that the rise in exchange rates is not due to strong European currency, but fundamentally due to the won's decline in value.
In the foreign exchange market, it was assessed that as the won weakened against the U.S. dollar, European currency values rose relatively. When the won weakens against the U.S. dollar, a key reserve currency, the won-euro and won-pound rates mechanically rise in tandem. On top of that, as European currency has held relatively steady against the dollar for policy reasons lately, the rate increases have been larger.
The Bank of Korea and the foreign exchange authorities recently pointed to a supply-demand imbalance rather than macroeconomic fundamentals as the backdrop for the weak won. They cited relentless dollar buying as institutional investors, including the National Pension Service (NPS), as well as individuals and corporations, expanded investments in overseas stocks and bonds.
The Bank of Korea noted that the cause of the cumulative weakness of the won in the second half was increased, ongoing dollar demand stemming from expanded overseas investment. In particular, there were assessments that the National Pension Service's dollar procurement and hedging methods have such a massive impact on the market that they have become a policy issue. A currency hedge is a risk-avoidance method that locks in a future exchange rate in advance to prevent losses from exchange rate fluctuations.
To rein in the surging exchange rate, the Bank of Korea expanded dollar supply onshore and set up a shield by extending its foreign exchange swap with the National Pension Service. Still, the prevailing view is that it will be insufficient to reverse the uptrend unless the overseas investment frenzy cools. Reuters said, "The Korean authorities have recently moved to stabilize the market by publicly linking the weak won to dollar demand arising from expanded overseas investment."
While the won has been weak, European currencies such as the pound and the euro have relatively maintained their value against the U.S. dollar. The interpretation is that the euro's rise to its highest level in 16 years against the won reflects both the won's weakness and the ECB's cautious monetary policy stance.
The Bank of England (BoE) cut its benchmark rate this month. When rates are cut, the money supply usually increases and the currency's value falls. But the Bank of England signaled that further cuts would likely be limited, citing inflation pressures. Reuters said, "After this rate cut, the Bank of England provided clear guidance, supporting a floor for the pound."
The euro is also maintaining a firm trend against the dollar. The ECB recently kept its policy rate around 2% and assessed that "the economy and prices are relatively stable."
The spike in exchange rates is delivering an immediate shock to the real economy. Travelers, students, and cross-border shoppers who must settle in euros or pounds are facing a sudden jump in costs. In particular, perceived prices across airfare, hotels, and tuition are reflecting the euro and pound exchange rate increases in full.
Corporations are seeing mixed fortunes. Exporters with a high share of European sales can benefit as their won-converted results improve. By contrast, importers bringing in energy, components, and high-end consumer goods from Europe are facing growing expense pressure. The burden of managing accounting gains and losses from rising hedging costs and exchange rate volatility has also increased.
Experts agreed that the future direction of exchange rates depends more on Korea's won supply-demand situation than on European Central Banks' policies. They said that as long as the trend of overseas asset allocation led by the National Pension Service and individual investors continues, the won will inevitably face structural weakening pressure.
Reuters quoted experts as saying, "Measures by Korean financial authorities may cushion sharp volatility, but to change the overall trend, supply and demand themselves must ease." Changes in U.S. foreign policy and the resulting global dollar flows are also key variables. This is why the outlook is dominant that the won-euro and won-pound rates will be slow to come down from high levels for the time being.