Won Hits Record Low Above 1521 Against Dollar; FX Stabilization Measures Extended 3 Months

The won-dollar exchange rate averaged 1521 won in June, reaching its highest level since the Asian financial crisis. The average won-dollar rate for June stood at 1521.4 won, marking the highest monthly average since February 1998, during the financial crisis.

Despite signs of economic recovery, the won-dollar exchange rate recently hit a 28-year and 4-month high. This surge is attributed to a combination of external factors, including the US Federal Reserve Chair signaling the possibility of further interest rate hikes, which strengthened the dollar and weighed on the market. The dollar index climbed to 101 on the 19th, its highest point since May of last year.

Companies held onto their dollar reserves, anticipating further currency depreciation. Despite a significant influx of dollars driven by robust exports, particularly in semiconductors, companies' reluctance to sell dollars into the market exacerbated supply-demand imbalances.

The government has extended emergency measures aimed at increasing dollar supply in the market by an additional three months. These measures exempt financial institutions from paying taxes (foreign exchange prudential surcharges) when borrowing funds overseas and supplying them domestically. Authorities expect these measures to alleviate dollar shortages and stabilize the exchange rate. Amid these domestic and external conditions, the government extended the duration of existing deregulation. The Bank of Korea has also extended its interest payment measures on excess foreign currency reserve deposits held by financial institutions by six months until the end of the year. A government official explained that the extension of the foreign exchange prudential surcharge exemption was primarily aimed at facilitating domestic foreign currency liquidity supply, rather than directly defending the exchange rate.

Market analysts suggest that if the US Federal Reserve's pressure to raise interest rates eases due to slowing inflation indicators, potentially driven by falling international oil prices, the current dollar strength could reverse. Possibilities of the exchange rate falling back into the 1400-won range from July onwards have been discussed.