Rate hits 1,530.8 won intraday, highest since March 31; foreign reserves fell $880 million in May; Iran strikes US bases; Koo Yun-cheol vows immediate action against excessive one-way moves

Currency exchange booths in Myeong-dong, Jung-gu, Seoul. The won-dollar rate broke through 1,530 won for the first time in about two months Thursday, also marking the first time the opening rate has crossed that level since the 2008 global financial crisis. [Yonhap]
Currency exchange booths in Myeong-dong, Jung-gu, Seoul. The won-dollar rate broke through 1,530 won for the first time in about two months Thursday, also marking the first time the opening rate has crossed that level since the 2008 global financial crisis. [Yonhap]

The won-dollar exchange rate broke through 1,530 won for the first time in about two months Thursday, as stalled peace negotiations between the United States and Iran and renewed tariff uncertainty weighed on the Korean currency. South Korea's foreign reserves fell $880 million in May as authorities intervened to stabilize the exchange rate.

The won opened at 1,530 won per dollar in Seoul's foreign exchange market Thursday, up 13.6 won from the previous session — the highest opening rate since March 31, when it stood at 1,519.9 won. The intraday high also matched that level. It was the first time the opening rate had exceeded 1,530 won since March 2009, during the global financial crisis.

The won-dollar rate closed above 1,500 won for 12 consecutive trading sessions through Tuesday, the second-longest such streak on record after a run of 49 consecutive sessions in late 1997 and early 1998 during the foreign exchange crisis. The current streak surpasses both the nine-session run in March and April immediately after the outbreak of the Iran war and the 11-session run in February and March 2009 during the global financial crisis.

The won's persistent weakness reflects a strengthening dollar driven largely by the failure to reach a resolution in US-Iran negotiations.

In the early hours of Thursday, Iran's Islamic Revolutionary Guard Corps struck US Air Force facilities in Kuwait and the US Navy's Fifth Fleet base in Bahrain. The IRGC said the attacks were retaliation for strikes on an Iranian oil tanker and a communications tower on Qeshm Island.

The escalating geopolitical uncertainty pushed oil prices and US Treasury yields higher. Brent crude futures settled up 1.9 percent at $97.81 per barrel, while West Texas Intermediate futures rose 2.4 percent to $96.02 per barrel. According to the electronic trading platform Tradeweb, the yield on the 10-year US Treasury note was trading at 4.49 percent near the close of New York markets Thursday, up 0.03 percentage point from the previous session. The 30-year yield rose 0.02 percentage point to 4.99 percent over the same period.

Foreign investors' continued profit-taking in domestic equities has added further downward pressure on the won. On Tuesday, foreign investors posted net selling of 6.6095 trillion won (about $4.36 billion) on the Kospi market — the third-largest net selling figure on record. As of 9:20 a.m. Thursday, foreign investors had already sold a net 1.9772 trillion won.

US tariff risk has compounded the pressure. Higher tariffs could reduce South Korean exports and cut dollar inflows, while simultaneously stoking inflationary pressure in the United States and boosting demand for the dollar.

Late Wednesday, the US Trade Representative imposed a 12.5 percent tariff on South Korea, citing the country's failure to introduce and effectively enforce a ban on imports of goods produced with forced labor. The USTR had been conducting an investigation under Section 301 of the Trade Act — targeting overproduction and imports of goods made with forced labor — after the US Supreme Court struck down the mutual tariffs as unlawful in February. With the overproduction probe still unresolved, the forced-labor tariff alone already approaches the 15 percent mutual tariff rate agreed upon last year.

"Since early May, upward pressure on the exchange rate has been building from a stronger dollar, rising global interest rates tied to the prolonged war, and foreign selling in domestic equities — and now tariff risk has been added on top of that," said Moon Da-eun, a researcher at Korea Investment & Securities. "To bring the exchange rate back down, an end to the war and a resulting drop in oil prices need to come first."

Deputy Prime Minister and Finance Minister Koo Yun-cheol convened a joint market monitoring meeting with relevant agencies Thursday morning. He said volatility in the foreign exchange market was widening "due to the Middle East war and continued foreign equity selling, despite a current account surplus at a record high level," and that "foreign investors' temporary portfolio rebalancing and profit-taking triggered by the sharp rally in the domestic stock market are further amplifying volatility." He added that authorities were "maintaining a high level of alert and closely watching developments to prevent anxiety from spreading amid elevated external uncertainty," and stressed that "necessary measures will be taken immediately against any excessive one-way moves."

Meanwhile, South Korea's foreign reserves fell to $426.99 billion in May from $427.88 billion the previous month, a decline of $880 million. The Bank of Korea said the decrease was "mainly attributable to market stabilization measures, including a foreign exchange swap with the National Pension Service." Under the arrangement, the pension fund procures dollars directly from the central bank rather than participating in the foreign exchange market, which helps put downward pressure on the exchange rate.

Foreign reserves had risen in February following a new issuance of foreign exchange stabilization bonds, then fell in March as authorities intervened to defend against the high exchange rate. They rebounded sharply in April on increased investment returns before declining again in May.


kimstar@heraldcorp.com