2023 was a relatively uneventful year for the Korean Won (KRW), with volatility at a minimum after an extended period of turbulence. The US Dollar (USD) made some small gains against the Asian currency – strengthening by about 2.5% against the won across the course of the year – but these movements were limited. The stabilising of the Korean Won after a period of heightened volatility during the coronavirus pandemic and its aftermath is raising hopes that the currency could now be set for a period of appreciation.
Indeed, economists at the Japanese investment bank MUFG predict that the currency “is set to be the front runner amongst its Asian peers.” With the won currently trading at 1,305 against the dollar, MUFG expects that it will strengthen to 1,285 by the end of the first quarter and 1,235 by the end of the year. What factors are driving hopes of a stronger won in 2024?
Semiconductor Recovery
One of South Korea’s crucial exports is semiconductors, which accounted for almost a fifth of the country’s exports in 2022. For example, Seoul is the global leader in producing memory chips, with two South Korean companies, Samsung Electronics and SK Hynix, alone representing 73% of the global market share.
The Korean Won was therefore hit by the decline in semiconductor revenues last year, with global revenues dropping from $598 billion in 2022 to $526.5 billion last year. The United States’ attempts to block Korean semiconductor exports to China also added a further element of risk and uncertainty in Korean foreign exchange markets.
However, the States has now committed itself to easing restrictions on South Korean exports, while the semiconductor industry globally is forecast to grow by more than 20% in 2024. This should give a boost to Seoul’s exports and, as a result, boost the country’s balance of payments. An improved trade balance would mean greater demand for the won relative to the dollar, leading to an appreciation in value.
China
The Korean Won is highly exposed to developments in its neighbouring market, China. This is partly because of how dependent the Korean economy has traditionally been on Beijing, its biggest trading partner, but also because of dynamics on foreign exchange markets. As the Chinese yuan (CNY) is not freely tradeable owing to China’s strict currency controls and price manipulation, traders have traditionally used the KRW as a proxy for the yuan. The won has therefore long served as an indicator for the overall strength of the Chinese economy on financial markets.
The Chinese economy is forecast to rebound in 2024, which should feed into a stronger won. Economists expect growth of around 4.6% this year, although there is the downside risk of real estate troubles weighing on investment and growth. The International Monetary Fund (IMF) recently upgraded its 2023 and 2024 forecasts which, if correct, are likely to provide a boost to the value of the won.
US Interest Rates
The main reason for the dollar’s gains against the won in recent years has been the Federal Reserve’s decision to raise interest rates significantly in the States. The Fed was the first major central bank to move quickly to hike rates in response to the higher levels of inflation that were brought about by the monetary response to the pandemic. Rates in the US are currently at a 22-year high, with the benchmark federal funds rate set between 5.25% and 5.5%.
By contrast, the Bank of Korea raised rates only to 3.25% – leading to a negative yield spread between the won and the dollar. This had a negative impact on the USD/KRW exchange rate because traders were able to gain higher yields by holding the greenback, which is also one of the safest financial assets in the world, incentivising capital outflows from South Korea and a weaker won.
However, the Fed is poised to cut rates this year, with its Chairman Jerome Powell recently saying that the central bank is “likely at or near its peak for this tightening cycle.” This could lead to a positive yield spread between the won and the greenback, which MUFG believe could “provide another layer of support for KRW” and encourage greater demand for the South Korean currency from foreign exchange traders.
2024 is set to be a positive year for the Korean Won – with a recovery in the global semiconductor industry, stronger growth in China, and lower rates in the States all suggesting the currency could make decent gains. With the South Korean regulator also poised to liberalise the country’s foreign exchange market in a bid to incentivise greater participation from foreign investors, there could be plenty of opportunities in KRW markets this year.
Author: Harry Clynch
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