The won-dollar exchange rate has taken a roller-coaster ride this year, with uncertainty high over its future course.

This increasing volatility -- which reflects a complex set of external and internal conditions affecting the country’s economy -- makes it tougher for policymakers to mobilize means to boost growth and for companies to draw up business plans.


The rate rose to 1,238.8 won per dollar on Feb. 25, up 66.3 won from where it was at the start of the year, marking the highest level in five years and eight months. This steep rise was propelled by global financial market turmoil, tumbling oil prices, concern over slowdown in emerging economies and growing geopolitical risks on the peninsula in the wake of Pyongyang’s nuclear and missile tests.

It prompted the Bank of Korea and the Finance Ministry to make a verbal intervention to curb the rapid pace of the local currency’s depreciation against the greenback. Some analysts and investors still expected the won-dollar exchange rate to continue to climb up to the 1,300-won level.

However, the rate soon began sliding sharply. The won strengthened to 1,153.6 won against the dollar on March 22 before weakening on the following days to stand at 1,169.2 won Saturday.

Not surprisingly, a recent study showed the won was more volatile than other currencies in terms of their exchange rates against the dollar.

In the comparison of 25 major currencies, conducted by the Korea Center for International Finance, which monitors financial and currency markets at home and abroad, the won’s 5.4 percent devaluation against the dollar over the first eight weeks of the year was the second fastest after the 16 percent depreciation of the Argentine peso. Over the following three weeks, the won appreciated against the dollar by 6.6 percent, the fourth rapidest after Russia’s ruble at 10.4 percent, the Brazilian real at 9.2 percent and the Colombian peso at 7.8 percent.

In the course of the won’s appreciation in recent weeks were the BOK’s decision to freeze its benchmark rate and the U.S. Federal Reserve’s move to hold its key rate steady. Fed officials also cut their forecast for rate rises this year to two from four.

A sharp rebound in oil prices has eased worries over emerging market economies.

These stabilizing conditions have led to foreign capital, in particular money from oil-producing countries in the Middle East, being repatriated back.

Foreign investors had pulled 9.8 trillion won ($8.3 billion) out of Korean equity and bond markets from the start of the year until Feb. 17. As of March 18, they recorded a net purchase of 500 billion won.

The benchmark Korea Composite Stock Price Index hit a yearly high of 1,996.81 Tuesday last week, mainly due to the return of foreign investors who have extended their buying streak.

But many analysts here remain cautious on the value of the Korean currency continuing to remain on an upward trajectory throughout the year.

“For the moment, the prospects for a steep rise in the won-dollar exchange rate may seem unfit for the market environment,” said Lee Sang-won, a researcher at the KCIF. “But the current conditions cannot be viewed as sufficient to fundamentally change the outlook for the weakening of the won.”

He said the local currency’s exchange rate would likely see continuous fluctuations down the road.

Choi Moon-bak, a researcher at the LG Economic Research Institute, also said it was difficult to expect the won to continue to strengthen, noting China’s economic slowdown and U.S. interest rate hikes should be understood as structural changes that will occur over a long span of time.

If the U.S. economic data scheduled to come out this week points to a reviving economy as expected, speculation will mount again that the Fed will take a more aggressive approach to rate increases.

Economists here raise the need for strengthening policy measures to prevent excessive fluctuations in the exchange rate, which would hamper efforts to boost the economy.

By Kim Kyung-ho (khkim@heraldcorp.com)