Bank of Korea Governor Lee Chang-yong said regarding the Korean won-to-dollar exchange rate rising close to 1,480 won during the recent year-end and New Year period, "It was difficult to justify even considering historically high current account surpluses."
On the 28th, during a conversation with Jan Hatzius, chief economist at Goldman Sachs, at the 'Global Macro Conference' held in Hong Kong, the governor said "Looking back on why the Korean won began to depreciate far more than what I believe to be appropriate, I was truly puzzled." The Bank of Korea released this dialogue through its YouTube channel on the 30th.
Regarding the background of the sharp rise in exchange rates at that time, the governor said it was a kind of "poverty in the midst of plenty," analyzing that "there were abundant dollars due to strong exports and such, but people were reluctant to sell dollars in the spot market." He continued, "Domestic investors including individuals, the National Pension Service, and institutional investors believed the value of the Korean won would decline further," and reflected, "it was very difficult to respond to such expectations."
In particular, he said, "The National Pension Service's overseas investment size has grown considerably compared to our foreign exchange market size," pointing out, "This continuously created expectations that the Korean won would depreciate, and those expectations led individual investors to again prefer overseas investment."
The governor said, "Recently, the National Pension Service announced that it would reduce this year's overseas investment size by half," assessing that "this means a reduction in dollar demand of at least 20 billion dollars or more." Moreover, "the National Pension Service's current target currency hedging ratio is 0%," he said. "As an economist, I don't personally think it makes sense. I believe the hedging ratio should be increased."
He said, "We also need to secure other hedging tools and sources of dollar funding," adding that "discussions are underway regarding whether to allow the National Pension Service to issue dollar-denominated bonds, and there will likely be changes in Korea's foreign exchange market structure within 3 to 6 months."
Regarding prices, he said, "If the exchange rate remains at the 1,470 to 1,480 won level for a long period, we may need to raise our price increase forecast," but expected that "inflation this year can be maintained at around 2%."
