(Revised): South Korean Exchange Rate

My brother and I both study in United States, therefore it costs more than $100,000 per year to pay for college in my family. As a result, I am very conscious about Korean won-US dollar exchange rate. Korean Won-US dollar exchange rate was as low as 900 Won per dollar in early 2008, but it rose rapidly to 1400 won per dollar by end of year 2009 due to financial crisis in 2008. When I started studying at the University of Michigan in 2008, my father sent me approximately 45million won, corresponding to $50,000 for tuition and living expenses. However, by the end of 2009, he had had to send over 77million won (corresponding to $55,000 – as tuition and living expense increased as well during 18 months), almost twice (in fact, 171%) compared to the amount he sent me a year ago. Thinking that 77 million won is “too much”, I decided to go back to Korea in order to fulfill my mandatory military service obligation for two years and wait until exchange rate settles down.

As the world economy recovered, so did Korea won-US Dollar exchange rate settled down. By the end of 2013, Korean won fell below to 1,050 won per dollar, recording lowest in more than two years. According to an article from Korea Herald (Korea keeps watch on won volatility), the main reason for the strengthening of Korean Won is due to economy recovery and United States’ quantitative easing. As more amount of US dollar is circulating in the market, relative strength of Korean won compared to US dollars grow naturally. For students like me, who needs to convert large amount of Korean won to US dollars, stronger currency is a big plus. However, as Korea has an export-driven economy with large sales of electronics and automobiles worldwide, a strong currency can hinder the export and act negatively in terms of economic growth.

Korean government and the central bank are well aware of it, and hinted that they are ready to intervene to curb the currency’s strength, according to the Wall Street Article (South Korea’s Won Falls After Officials Hint of Intervention). As Korean won hit a two-year high against the dollar (one possible cause being US quantitative easing) and five-year high against the Japanese yen (similarly, Abenomics being a reason), the Korean stock market ended at a four-month low, with Samsung Electronics stock decreasing by 5.5%. Korean central bank intervened last October by bringing $2 billion to slow gains, and it hinted that they are monitoring market flows closely to protect the economy against exchange rate volatility.

Recently, won-dollar rate has rose to 1080 won per dollar. Part of the reason might be tapering of US quantitative easing. According to Wall Street Journal in January 22nd (IMF Calls Out South Korea on Its Currency Policy), IMF told Korea that it should only intervene in exchange-rate markets to prevent volatility that might damage the economy. The Wall Street Journal highlighted the fact that “although countries can devalue their currency by buying foreign currency, the move puts upward pressure on other countries’ exchange rate and can fuel trade and political tensions between governments.”

For me personally, won-dollar rate of 1080 is too high and hope it goes back to 900 back in “good, old days.” However, I am aware that Korean economy is depending heavily on export on electronics and automobiles. From my memory, I remember Samsung electronics and Hyundai Motors still performed well in world market when currency rate was around 900 won per dollar. If they continue to make fine, quality products, I believe that they can still perform well globally regardless of exchange rate. Furthermore, companies should continue their best to cut down the cost and also manage their exchange rate risks by “hedging” it. So should Korean government try to manipulate the exchange rate? I think the market should decide what exchange rate should be.