Exchange Rate Plunges to 1,020: Lowest Level in Seven Years

The won-dollar exchange rate has fallen to 1,020 won level in seven years and two months, alarming the export industry because the won’s appreciation in general hurts price competitiveness of export goods.

The won-dollar rate closed at 1028.7 won in the Seoul Foreign Exchange Market on January 27, a drop of 2.9 won from the previous day.

That is the lowest level since November 18 in 1997 when the rate recorded 1,012.8 won.

Because of the influence, the Korean Composite Stock Price Index and KOSDAQ (Korea Securities Dealers Associated Quotation system) closed at 924.87 and 466.45 on January 27, down 2.13 points and 2.04 points respectively from that of the previous day.

During the day, the won-dollar rate fluctuated from 1,027.1 to 1,030.0 starting from 1,028.0. Foreign exchange dealers said, “The government involved in the exchange market in the past if necessary, to manipulate the rate.”

The fall in the won-dollar rate on this day was attributed to experts’ expectations that the won’s appreciation will be inevitable as China has been increasingly under pressure to revaluate its currency (the yuan) at the G7 meeting scheduled in London on February 4.

Manager Lee Jung-wook of Woori Bank forecasted, “Since the 1,030 mark, a psychological prop, already collapsed, it is highly possible that the rate drops further.” “The rate could fall below the 1,000 mark unless the government intervenes,” he added.

Meanwhile, Lee Gwang-ju, the international director of the Korean Bank said “The trend of a strong won is a seasonal phenomenon as export companies sell their reserved dollars to make monies for settlement funds and the lunar holiday, but I am watching the exchange market closely.”

The Federal Open Market Committee (FOMC) under the Federal Reserve Board (FRB), scheduled for February 2, is also another variable for the situation.

Byun Myoung-kwan, the manager of the financial market sector of Choheung Bank, explained, “If the FRB raised its interest rates less than expected, the weak dollar trend will stay longer, so the strong won phenomenon will continue.”

The Industrial Bank Institute under the Industrial Bank conducted a survey of 391 export companies in December last year and released the results on January 27. According to the report, 84.2 percent of the companies have difficulties in making profits or make losses from the dollar fluctuation.

Also, small-and-mid sized companies responded that they had to stop exporting if the rate falls below 1,005.7 and said that the rate should be at lest 1,115.6 in order to avoid losses.

As of now, only 9.9 percent of businesses are ready to cope with exchange rate risks, and most small-and-mid sized companies are exposed to risk without any countermeasures.

Kyung-Joon Chung Jin-Hup Song news91@donga.com jinhup@donga.com