On the 28th, Bank of Korea Governor Shin Hyun-song said at a press briefing after holding the base rate at 2.5% a year, "We will respond firmly to one-sided moves in the exchange rate," adding, "We have both the means and the will to ease one-sided exchange rate moves." Recently, the won-dollar exchange rate has steadily risen under the influence of large net selling of stocks by foreign investors and is being transacted above 1,500 won.
Answering a question that day about the causes of the recent won weakness, Governor Shin said, "Let me take this opportunity to say one thing clearly and unequivocally," before making the remarks. Shin said, "We will not tolerate one-sided moves in the exchange rate."
Shin said the most important factor behind the won's weakness is "the Middle East war." He added that "risk-off sentiment due to the Middle East situation is a phenomenon commonly seen not only in Korea but also in oil-importing countries." He continued, "What is encouraging in this situation is that if the Middle East situation progresses quickly, it will be a factor leading to won strength."
Shin also explained that if the interest rate gap between Korea and the United States narrows going forward, the won's weakness will ease. As Korea has held the base rate at 2.5% a year since Aug. last year, the current rate gap with the United States (3.50%–3.75% a year) is up to 1.25 percentage points. Shin said, "When Korea's rates are lower than those of the United States, it is much easier to borrow won and buy U.S. dollars—a 'won carry trade,'" adding, "If we find ourselves in a situation of raising rates, the gap would narrow and the won's weakness might fade."