The won isn’t likely to strengthen to pre-pandemic levels, given structural changes including heightened geopolitical competition, an aging population and increasing demand for overseas investment, according to a Bank of Korea board member.
The currency has weakened amid high volatility since last year on the back of dollar strength and Korean overseas investments — and a deterioration of the nation’s trade balance — Suh Young Kyung said during a panel discussion hosted by the central bank.
A weakening won has contributed to rising inflation in South Korea, leading to a round of rapid rate hikes by the BOK. While the currency rose on Friday to around 1,310 per dollar, it remains about 3% weaker this year, among the worst-performing in Asia.
Trade surpluses that traditionally used to help ease volatility in the won don’t have the same impact nowadays due to an increase in dollar-denominated prices and the nation’s high dependency on energy imports, according to Suh. Rather, the won is now more influenced by capital flows, she said.
That raises the need for an “integrated policy framework” combining solid macroeconomic policy that would boost circulation of funds and lure more investors into Korea with the nation’s foreign-exchange market stabilization policy, Suh said. Structural efforts to enhance export competitiveness and to diversify export markets are important too to cap the won’s volatility, she added.
--With assistance from Seyoon Kim and Shinhye Kang.
