Won-Dollar Exchange Rate Surges Past Ceiling... Further Increases Likely If War Drags On

If Oil Prices Rise Due to Prolonged War, Safe-Haven Demand Will Strengthen

"All Eyes Must Remain on Oil Prices for Now"

Yonhap News Agency

The won-dollar exchange rate surpassed 1,520 won during intraday trading for the first time since the global financial crisis, fueled by concerns over a prolonged war involving Iran. Market forecasts suggest that if oil prices rise further, the global preference for safe-haven assets will intensify, making an additional increase in the won-dollar exchange rate inevitable.

Geopolitical Risks Lead to Disruptions in the Energy Supply Chain

On March 31, iM Securities provided this analysis regarding the exchange rate situation. In the Seoul foreign exchange market the previous day, the won-dollar exchange rate soared to 1,521.1 won at around 4:33 p.m. This marks the highest level in approximately 17 years, since March 10, 2009, when it reached 1,561.0 won during the global financial crisis.

Since the outbreak of war between the United States and Iran, the U.S. dollar index has only risen by 2.2% based on the previous day's closing price. In contrast, the value of the won has plummeted by about 5%. Unlike the won-dollar exchange rate, the yen-dollar exchange rate—which historically showed a high correlation—has been contained around the 160-yen level. On February 27, the won-yen exchange rate stood at about 921 won, but as of the previous day, it had surged to nearly 950 won.

The weakness of the won is attributed not only to instability in dollar supply and demand but also to concerns about oil-driven deterioration in South Korea's economic fundamentals.

First, the flow of dollar supply and demand is acting unfavorably for the value of the won. Foreign investors have been net sellers in the domestic stock market for several consecutive days. Based on the KOSPI index, foreign investors recorded a net sale of 21 trillion won last month and have sold over 32 trillion won so far this month. Both market sentiment and supply-demand dynamics are putting pressure on the exchange rate. In addition, concerns are rising that next month, strengthened corporate dividend policies will lead to a significant increase in demand for dividend repatriation by foreign investors, further amplifying worries over dollar supply.

Concerns about the deterioration of South Korea's economic fundamentals due to prolonged high oil prices are also driving the won's weakness. Recently, the Organisation for Economic Co-operation and Development (OECD) sharply revised South Korea's GDP growth forecast for this year downward from 2.1% to 1.7%. This suggests that the South Korean economy may be particularly vulnerable to the shock of high oil prices. Park Sang-hyun, a researcher at iM Securities, said, "The situation stemming from Iran has escalated from a geopolitical risk to disruptions in the energy supply chain, amplifying the impact on Asian economies, including South Korea. Even if negotiations between the United States and Iran are settled, supply chain disruptions for energy-related products such as crude oil are likely to persist for a considerable period, which could restrict a strong rebound in South Korea's economy or financial markets."

Unpredictable Exchange Rate Conditions Expected to Continue

While the inclusion of South Korea in the World Government Bond Index (WGBI) and the return of domestic market accounts (RIA) next month could improve dollar supply and demand conditions, the positive effects on the foreign exchange market are being muted by the prolonged impact of high oil prices. Ultimately, analysts say that without stabilization in oil prices, it will be difficult to expect a stable won-dollar exchange rate for the time being. If the situation with Iran escalates into a full-blown conflict, further increases in the won-dollar exchange rate appear unavoidable.

In this scenario, it is expected that the U.S. economy will enter a phase of stagflation (economic stagnation accompanied by high inflation). If a mild recession and heightened inflationary pressures push U.S. Treasury yields even higher, global funds may flow even more strongly into the safe-haven U.S. dollar, causing the won-dollar exchange rate to climb further.

Researcher Park explained, "An exchange rate above 1,500 won per dollar is considered an undervaluation of the won relative to South Korea's economic fundamentals. However, as the won-dollar rate remains exposed to the ongoing risk of high or rising oil prices, we will have no choice but to closely monitor oil price movements for the time being. That said, we should be careful not to directly equate the sharp rise in the exchange rate with a crisis in the domestic economy or financial markets."

This content was produced with the assistance of AI translation services.