High Oil Prices and Exchange Rates Put Pressure on Prices: Bank of Korea Monitoring Exchange Rate

Won painting that doesn’t work hard The won-dollar exchange rate is displayed at a currency exchange office in Myeong-dong, Seoul on the 14th. The exchange rate on the 12th was 1375.4 won, the highest level in 17 months since November 10, 2022 (1377.5 won) based on the closing price. Reporter Kim Chang-gil

Due to the escalating war crisis from the Middle East and uncertainty about U.S. monetary policy, the won-dollar exchange rate has surpassed 1,375 won in 17 months and is on the verge of crossing the 1,400 won level. This is the first time that the won-dollar exchange rate has exceeded the 1,375 won level since the foreign exchange crisis in 1997, the global financial crisis in 2008, and the US Federal Reserve’s high-intensity austerity period in 2022.

In the Seoul foreign exchange market, the won-to-US dollar exchange rate, which was 1,293 won at the beginning of the year, rose by 82.4 won (6.4%) as of the 12th. Based on the closing price, it has been 17 months since November 10, 2022 (1377.5 won) that the exchange rate exceeded 1,375 won.

Looking at the fundamentals, the exchange rate is likely to stabilize. Due to the recovery in semiconductor exports, the current account has been in surplus for 10 consecutive months, and foreign funds flowing into the domestic stock market from November last year to March this year amounted to $17.1 billion (approximately 2.351 trillion won). However, as the U.S. price index continues to soar, the timing of interest rate cuts has become unclear, and the growing conflict in the Middle East is encouraging the strong dollar. Bank of Korea Governor Lee Chang-yong said after the Monetary Policy Committee meeting on the 12th, “We are not in a situation where an economic crisis is caused by exchange rate changes like in the past, and overseas investment and assets have increased significantly, and a developed country-style foreign exchange market structure has been established.” Even if the exchange rate rises, it is not a situation to be concerned about as in the past.

However, if the high exchange rate continues, import prices may rise, which may have a negative impact on overall prices. In particular, as crude oil is paid for in dollars, there is a high possibility that living prices such as transportation and utility bills will rise due to the high international oil price, which is approaching $90 per barrel.

As fears of an escalation of war grow, with Israel declaring retaliation when Iran attacks the mainland, some predict that in the worst case, the exchange rate could exceed 1,400 won per dollar. Oh Jae-young, a researcher at KB Securities, said, “There is no particular resistance zone after 1,360 to 1,370 won per dollar, which was the strongest resistance zone, so we need to keep in mind an increase to the 1,400 won range.”

President Yoon Seok-yeol held an emergency economic and security meeting on the 14th and ordered the intensive operation of analysis and management systems related to international oil prices, energy supply and demand, and supply chains. Deputy Prime Minister for Economy and Finance Choi Sang-mok said, “We will play the necessary role if volatility in the financial and foreign exchange markets increases excessively due to external shocks.” This is interpreted as an indication of government intervention in the event of a sharp rise in the exchange rate.

The Ministry of Trade, Industry and Energy held an emergency inspection meeting on this day and intensively inspected the supply and demand of crude oil and the logistics situation of exporting companies. As political instability in the Middle East increases, it is expected that oil prices will rise for the time being. Iran has the third largest crude oil production in the Organization of Petroleum Exporting Countries (OPEC), and Middle Eastern crude oil imported into the country passes through the Strait of Hormuz in front of Iran.