Obsession with Forcing Down the Won Risks Bigger Losses

Dec. 29 (Asia Today) — South Korea’s foreign exchange authorities intervened in currency markets on Dec. 24 and Dec. 26, pushing the won-dollar exchange rate down from above 1,485 won to the mid-1,440 range. During trading on Dec. 26, the rate briefly touched the 1,420 level. Over the two days, the intraday fluctuation reached 55.4 won.

Authorities issued an unusually strong message immediately after markets opened on Dec. 24, saying the move would demonstrate the government’s “strong will and policy execution capability.” The intervention appears to have involved direct dollar sales from official holdings.

Such action is not entirely avoidable. The year-end exchange rate is used as a benchmark for corporate and financial institutions’ foreign currency liabilities and for capital adequacy calculations under international standards. If the closing rate were to remain near 1,480 won, companies and financial institutions with large dollar-denominated debt could face deteriorating credit profiles, potentially leading to reduced lending and weaker investment next year.

But market intervention carries clear costs. To supply dollars not readily available in the market, authorities must draw on foreign exchange reserves or use part of the National Pension Service’s overseas assets. The pension fund can hedge currency risk through foreign exchange swaps with the Bank of Korea or through forward contracts covering up to 10% of its foreign investments. That hedging capacity appears to have already been deployed.

The maximum swap line between the two institutions, extended through the end of next year, totals $65 billion (about 95 trillion won). While sizable, repeated intervention could exhaust it quickly. Beyond that point, authorities would have to rely on foreign exchange reserves or issue foreign exchange stabilization fund bonds. From the pension fund’s perspective, heavier reliance on hedging also weighs on investment returns, directly reducing profitability at the National Pension Service.

Some market participants now expect the government to push the year-end rate toward the low 1,400 range, or even below 1,400 won, after witnessing two days of decisive intervention. In the near term, traders appear to be taking a wait-and-see approach in response to the authorities’ resolve. Some forecasts suggest the won could remain in the low-1,400 range into early next year.

Over time, however, dollar demand from households and corporations is likely to return. The recent surge in demand reflects structural forces rather than temporary factors. Beginning next year, as much as $20 billion is slated for U.S.-focused investment funds under tariff-related agreements, while large conglomerates are expected to begin executing pledges to invest a combined $150 billion in the United States.

As the global economy enters an era driven by artificial intelligence, the competitiveness of U.S. growth companies continues to stand out. Against this backdrop, it is unrealistic to expect retail enthusiasm for U.S. assets to fade quickly.

Foreign exchange authorities will need to address these structural pressures weakening the won in a gradual and sustainable manner. An excessive focus on forcing the exchange rate lower in the short term risks producing costs that ultimately outweigh any immediate gains.

— Reported by Asia Today; translated by UPI

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