As the won-dollar exchange rate has repeatedly hit fresh yearly lows, Bank of Korea Governor Shin Hyun-song stressed predictability over any particular exchange rate level. He described the recent decline in the won-dollar rate as "a process of normalizing an abnormal situation" and said the won remains undervalued on an effective exchange rate basis, leaving open the possibility of further declines.
"Predictability is very important when it comes to the exchange rate," Shin said at a news conference on the 22nd following the Monetary Policy Board's rate-setting meeting. He characterized recent moves as "a process of normalizing an abnormal situation." Even with the rate falling quickly, he emphasized market predictability rather than naming an appropriate level or asserting a direction.
Shin also judged that the won remains weak. Measured against the Bank for International Settlements' effective exchange rate index, the won is still soft compared with other currencies, he said. The won's effective exchange rate index stood at 89 in August, below its long-term average of 101. His point was that the dollar exchange rate alone is not enough to judge whether the won is fairly valued.
He also pointed to the benefits of a stronger won for household purchasing power. A 10% rise in the won's value could lift the purchasing power of households in the bottom 20% by income by more than 0.4%, Shin said. Lower import prices from a stronger won can ease living costs for low-income households, he said.
Because he framed the recent decline as a normalization of a period of elevated exchange rates rather than a one-sided appreciation of the won, analysts read his remarks as signaling that the central bank will weigh market predictability rather than defend any specific level.