The South Korean won and the United States dollar are among the world’s most liquidly traded currencies. Their exchange rate has a wide range of implications, touching not only the business community and investors but also personal life and the economy at large. The following paper examines what leads to changes in the WON TO USD exchange rates, some historical trends, and what impact such changes have on different sectors of the economy.
A Concise but Important History of the South Korean Won.
When describing the currency of South Korea, one should use the formal word “won.” Its history reaches as far back as the times of the Joseon Dynasty. The adoption of the modern denomination as we know it today dates back to 1962, as an aftermath of a series of reforms regarding currencies. The administration is carried out at the Bank of Korea, which performs in this country like a central bank.
Significance of the Won to USD Exchange Rate
Loffredo says, “The won to USD exchange rate is very important for a variety of reasons. Most importantly, the United States, in particular, is one of South Korea’s largest trading partners.” Indeed, a large chunk of South Korea’s exported products are headed towards the U.S. market, like electronic appliances, automobiles, and machinery. And in turn, it imports huge amounts of goods and services from the U.S., mainly in regard to technology and machinery, followed by agrarian products.
Another is the exchange rate, which aids foreign investment activity. An effective exchange rate would attract investors from other countries to South Korea, who would, for instance, help develop the economy of the country. A bad one might scare away investments and dampen economic growth.
Factors that Influence the Exchange Rate of the Won to USD
The rates at which the won is exchanged for USD depend on several elements. This includes:
1. Economic Performance
• The state of the economy in South Korea and the United States dramatically influences the performance of the exchange rate. When the former economy is doing well, its strength against the USD increases. However, a stable economy in the United States will render the USD stronger against the dollar.
2. Interest Rates
• Another important and influential factor is the interest rate set by the central banks of both countries. For example, higher interest rates in South Korea may attract foreign capital and appreciate the won, whereas the raising of interest rates by the U.S. Federal Reserve can strengthen the dollar.
3. Inflation Rates
• The inflation differentials between the two countries will also affect the exchange rate. Should South Korea have a higher inflation rate than the U.S., this would cause the won to depreciate versus the dollar.
4. Political Stability
• Political stability in South Korea and the U.S. also play key roles in influencing investor confidence since any political turmoil in South Korea may lead to the depreciation of the Won, as investors will divert to safe assets like the USD.
5. World Economics Events
Global economic events, from a financial crisis to a pandemic or trade war, are likely to cause various exchange rate fluctuations. For instance, during the 2008 financial crisis, the won depreciated greatly against the dollar due to a reduction in investor confidence.
Key Historical Trends in the Won to USD Exchange Rate
Over the last few years, the won-to-USD exchange rate has seriously weakened. In the late 1990s, during the period of the Asian financial crisis, it was heavily depreciated against the dollar at a very sharp rate—from about 900 KRW/USD to almost 2,000 KRW/USD in just a very short time frame. That had been facilitated by a loss in investor confidence and a devastating recession that had taken firm root in South Korea.
Over the next number of years, the government managed to restore the South Korean economy, which helped it further strengthen in value. In the mid-2000s, the exchange rate began to soften; it was quite stable at about 1,000 KRW/USD. However, depreciation set in once again because of the global financial crisis in 2008, with the value tapering off to around 1,500 KRW/USD.
For the past two years, it used to be quite stable, moving up and down between 1,100 and 1,200 KRW/USD. Then came global disruptions caused by COVID-19-related conditions, that finally took a temporary swing.
How the Exchange Rate Affects the South Korean Economy
In South Korea, there are some critical impacts of exchange rates all over the economy in different sectors.
1. Exporters
A weakening won typically benefits South Korean exporters by providing price advantages for their products and increasing their competitiveness in the global market. For example, a weakened dollar will benefit companies such as Samsung and Hyundai when they sell their products in the U.S.
2. Importers
Conversely, a weak dollar is detrimental to importers in that it raises the price of imported or purchased goods. This can contribute to higher costs of doing business for businesses that depend on imported raw materials or machinery and hence impact profitability.
3. Consumers
• The exchange rate level may very easily impact the price level of the imported items, for instance, electronic gadgets, clothing, and foodstuffs, among others, that are all customized to be of considerably high attraction to South Koreans, and yet, it is their rate of price increase that will indicate a higher price and hence lower purchasing power in consumers, thereby reducing consumption expenditure.
4. Foreign Investment
• The exchange rate is also another determinant of foreign investments. A stable and attractive exchange rate in most instances will attract foreign investment in the other classes of financial investments in South Korea, like real estate and business investments. On the contrary, a volatile or otherwise unattractive exchange rate would see people flow capital the other way around.
Exchange Rate Risk Management Strategies
Business people and companies, with awareness about the war and its impact on businesses and companies, have embraced different approaches in strategies meant for the management of exchange-rate risk. Here are some common ways in which firms achieve risk reduction.
1. Hedging
Hedging: This will entail the use of financial instruments, such as futures contracts, options, or forward contracts, among others, to cushion an entity against the shocks of unpredictable movements in exchange rates. For example, an exporter in Korea will use a forward contract to attain a better rate for a future transaction and hold it irrevocably.
2. Diversification
• Diversification involves the distribution of investments across different currencies, assets, or markets in such a manner that less risk is attributed to fluctuations in exchange rates. That is, businesses and investors actively engage in measures of diversification to reduce exchange rate exposures.
3. Management of the currency risk
• Some business organizations use currency risk management practices like US$ invoicing or even natural hedges. For example, a company in South Korea that imports raw material from the U.S. and exports products manufactured from such raw material to the U.S. would be matching its USD-denominated revenues with its USD-denominated costs, therefore offsetting its currency risk.
The Won to USD Exchange Rate: The Future of It
Of course, considering the vast array of factors, some heavily interdependent, it is quite a hard job to predict into the future what course the Wŏn-to-USD exchange rate will take. Be that as it may, a few trends and market developments may influence the course of the exchange rate in the next few years.
1. How Pandemics Recovered the Economy
• WON-USD Exchange Rate: The global economy can recover from COVID-19; hence, the WON-USD exchange rate will be stable. However, it is the ease or difficulty of how fast South Korea and the USA recover that will play a big role in metamorphosing the direction of the exchange rate.
2. Monetary policy
The monetary policy undertaken by the Bank of Korea, together with that of the U.S. Federal Reserve, is seen to have a long-term impact on the exchange rate in the future. Any alterations in interest rates or incremental changes in quantitative easing policies may move the said won-to-USD exchange rate.
3. Geopolitical Developments
It could also include geopolitical events like trade negotiations, war, or any other change within international alliances that would most probably affect the exchange rate. This would also mean, in the same manner, that a similar change in the trading relationship between the U.S. and South Korea would affect the Won.
Conclusion
Arguably, one of the biggest impacting factors for the economy, businesses, and consumers in South Korea would be the exchange rate of the USD to the Won. General decisions based on the global market need precise knowledge about setting the exchange rate, past performance behavior, and the future. Be you a business person or an investor, this is what keeping informed and knowing the won against the USD exchange rate does in shaping how one goes about their docket within this complex global economy.