Commissioner Kim Jong-hwa of the Bank of Korea's monetary policy committee said on the 10th that about two-thirds of the recent rise in the won-dollar exchange rate was due to increased overseas investment by the National Pension Service, asset managers, and individuals.
Commissioner Kim said this in response to a question about an "assessment of the recent strong dollar" at a press briefing held at the Bank of Korea annex in Jung-gu, Seoul, on the morning of the same day.
Commissioner Kim said, "The won-dollar exchange rate surged from the mid-1,300 won range in May to the 1,470 won range recently, and internal analysis showed that about 70% of the total increase was due to supply-demand factors." He added, "A variety of economic actors, including the National Pension Service, asset managers, and individuals, increased overseas stock and bond investments in anticipation of higher returns."
Some argue that "the increase in M2 money supply caused the strong dollar." On this, Commissioner Kim explained, "The increase in money supply may have affected the exchange rate to some extent, but the current money supply growth rate is almost the same as the average during past easing cycles." He added, "For money supply to affect the exchange rate, inflation needs to occur, but core inflation is currently stable."
Commissioner Kim said that if the strong dollar persists, polarization between large corporations and small and midsize companies will intensify and domestic demand will also be hurt. He said, "A higher exchange rate can be positive for exporters, but sectors with a large import share, such as petrochemicals, will face greater burdens," adding, "Small and midsize companies that lack the capacity for currency hedging (selling dollars at a predetermined rate to eliminate exchange rate risk) or find it difficult to pass higher intermediate goods costs onto product prices will have an even harder time."
He continued, "A higher exchange rate pushes up import prices, leading to overall inflation, which can dampen private consumption by lowering household purchasing power," adding, "There is also a possibility that corporate investment will slow due to higher prices for imported raw materials and capital goods." He explained, "Bank of Korea (BOK) presented a forecast of 2.1% for next year's consumer price inflation, reflecting factors such as stable international oil prices, but the strong dollar can affect prices, so the Monetary Policy Board is closely monitoring it."
Commissioner Kim said he would watch the policy stance of major Central Banks and make future rate decisions. The U.S. Federal Reserve will decide this year's final benchmark rate on the 9th to 10th (local time). The current benchmark rate is 3.75% to 4.00% annually, and economic experts see a high possibility that the Fed will cut this time. The Bank of Japan (BOJ) will set its benchmark rate on the 18th to 19th. The current rate is 0.5% annually. There is a view that the BOJ could raise rates this month.
Commissioner Kim said, "Whether to cut rates may vary depending on each country's economic conditions," adding, "There are reports that global rate cuts may be ending, but we can discuss the direction after watching the situation a bit longer."
Meanwhile, Bank of Korea (BOK) held this year's final regular meeting of the Bank of Korea's monetary policy committee last month and kept the benchmark rate at 2.5% annually. Commissioner Kim, who took office in April last year, has not issued a dissenting view at the Bank of Korea's Monetary Policy Board.