Koo Yun-cheol, Deputy Prime Minister for the Economy and Minister of Strategy and Finance, posted on X (formerly Twitter) on the 1st that "an excessive won weakness divorced from fundamentals does not help our economy." The day marked the 20th day since the won-dollar exchange rate surpassed 1,500 won. During that period, including this day, Koo made verbal interventions only twice. That differs from late last year and early this year, when the Ministry of Strategy and Finance and the Bank of Korea (BOK) made several verbal interventions as the rate climbed into the upper 1,400-won range.
◇ Government messages less frequent and softer than when the rate was in the 1,400-won range
The won-dollar rate opened at 1,508.5 won that day. It eased after surging to 1,536.9 won the previous day but remained in the 1,500-won range. On the 19th of last month, Koo said, "If the exchange rate deviates excessively from fundamentals, we will respond in a timely manner," and issued his second verbal-intervention remark in the 1,500-won range that day.
There is an assessment that the frequency and intensity of government messages have fallen compared with the fourth quarter of last year to early this year, when the rate was in the 1,400-won range. At that time, there were more than six verbal-intervention remarks from the Ministry of Strategy and Finance and the Bank of Korea (BOK). Among the remarks was a strong message that "you will soon see the government's firm resolve and policy execution capability." There were also four rounds of direct foreign-exchange policy responses.
◇ "The drivers of won weakness have changed, and so has the response"
Officials see the change in response as stemming from different causes of the won's weakness now versus then. Late last year, the weakness was closer to a "supply-demand weakness" driven more by domestic dollar demand than external variables. At the time, four factors worked in unison to push up the won-dollar rate: ① Korean retail investors trading U.S. stocks ② overseas investment by corporations ③ overseas investment by the National Pension Service ④ foreign selling.
But the won weakness that emerged in March has been strongly influenced by the external factor of the "Middle East war." A senior government official said, "Compared with the fourth quarter of last year, only 'foreign selling' among the four factors is very pronounced and is almost the sole factor lifting the exchange rate recently," adding, "In the end, once the war issue is resolved and foreign investors return, the rate will revert to an appropriate range."
Foreign investors were net sellers of more than 35 trillion won in total on the Korea Composite Stock Price Index (KOSPI) in March. That far surpassed February's net selling of 21 trillion won, the largest on record on a monthly basis. A market official said, "As the Middle East war drags on, a preference for safe assets has boosted demand for converting into dollars, and it appears there was a strong move to realize revenue first in the Korean market, where returns had been high."
◇ "Record-high" defense of the exchange rate in the fourth quarter last year… "Now there is concern it would only burn through firepower"
Because the recent exchange rate rises and falls depending on whether the Middle East war expands, there appear to be limits to controlling the market with government messages or policies. A government official said, "At a time like this, when even a single word from Trump roils the market, we can't help but stay put."
Actual intervention, a step beyond verbal moves, was also carried out aggressively in the fourth quarter last year. According to "net transactions by foreign-exchange authorities" disclosed by the Bank of Korea (BOK), the authorities made net sales of $22.467 billion in the foreign-exchange market in the fourth quarter last year to stabilize the market. That is the largest since the BOK began releasing related statistics in the third quarter of 2019.
Market experts say it is difficult for the foreign-exchange authorities to engage in aggressive actual intervention under current conditions. If they deploy foreign-exchange reserves when the won's value is falling due to external issues rather than supply-demand imbalances, it would expend firepower without effect.
As of the end of February this year, foreign-exchange reserves stood at $427.62 billion. As the market views the $400 billion level as a "psychological Maginot line," there is also speculation that authorities may be cautious about large-scale actual intervention.