With the government stepping in aggressively in the foreign exchange market on the 24th, the won-dollar rate closed at 1,449.8 won, down 33.8 won from the previous day. It is the first time the rate has fallen to this level since on the 6th of last month (1,447.7 won). But the won's depreciation in the fourth quarter this year ranks as the fifth largest among 42 currency. The rate could rise above 1,480 won at any time.
◇ Won falls 3.3% in the fourth quarter… fifth among 42 countries
According to the Bank of Korea on the 25th, the won's value fell 3.3% in the fourth quarter. The drop was the fifth largest among the 42 currency tracked by the Bank of Korea, after Argentina (-6.8%), Japan (-5.1%), Brazil (-3.7%) and Taiwan (-3.4%).
During the same period, the dollar index (DXY), which shows the value of the U.S. dollar against the currencies of six major countries, held in the 97–98 range. Against that backdrop, the won's distinct decline was the result of a combination of factors including ▲ net selling of domestic stocks by foreigners ▲ increased overseas investment by the National Pension Service and domestic individual investors ▲ a rise in derivatives investments betting on a stronger dollar.
The won's purchasing power also fell. According to the Bank for International Settlements (BIS), last month the won's "real effective exchange rate index" was 87.05, the lowest since the end of 2009 (85.47), during the global financial crisis. An index below 100 means the currency's purchasing power has fallen below the 2020 average, the base period.
◇ Individuals, institutions, and corporations ramp up overseas investment… "Domestic investment must become more attractive"
As the recent upward trend in the exchange rate continued and topped 1,480 won, the government on the 24th issued a strong verbal intervention. The Ministry of Economy and Finance and the Bank of Korea said in a message sent to reporters at 9:01 a.m., "An excessive weakening of the won is undesirable," adding, "You will soon see the government's strong will and capacity to implement policy." The Ministry of Economy and Finance then unveiled a foreign exchange market stabilization tax package that would reduce capital gains taxes if investors sell overseas stocks and invest in domestic stocks for more than one year.
Experts say the government's response is insufficient to reverse the current flow into overseas assets in the short term. According to the Korea Securities Depository (KSD) Securities Information Portal (SEIBro), individual investors made net purchases of overseas stocks worth about $32,769.14 million (about 47.5 trillion won) through on the 23rd this year. On an annual basis, that is the highest on record. Dollar asset holdings by the National Pension Service and corporations are also on the rise. As of the end of September, the National Pension Service's overseas stock investment stood at 508.2 trillion won, up 77.2 trillion won from the end of last year. Foreign currency deposits held by domestic corporations also rose by $5.14 billion to $92.26 billion.
Baek Seok-hyun, an economist at Shinhan Bank, said, "Unless the domestic stock market becomes more attractive to investors, the weakness could persist in the long term." He added, "We need measures that can comprehensively address the decline in potential growth and sluggish domestic demand." Lim Hwan-yeol, a researcher at Woori Bank, said, "Foreign exchange authorities should declare that they will defend more forcefully against further rises in the exchange rate," adding, "The upward trend in the rate will not stop until figures confirm that funds flowing into the dollar are moving into domestic stocks."