BOK Chief: Won-Dollar Exchange Rate May Stabilize if Middle East Conflict Doesn't Escalate

Bank of Korea Governor warns won-dollar rate may stabilize if Middle East tensions don't escalate, as rising oil prices and market volatility pose risks to the economy.

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Wojciech Zylm
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BOK Chief: Won-Dollar Exchange Rate May Stabilize if Middle East Conflict Doesn't Escalate

BOK Chief: Won-Dollar Exchange Rate May Stabilize if Middle East Conflict Doesn't Escalate

Bank of Korea Governor Rhee Chang-yong stated that the won-dollar exchange rate may stabilize if the conflict between Iran and Israel in the Middle East does not escalate into a wider war or a blockade of the Strait of Hormuz. Rhee's comments suggest that the stability of the exchange rate is closely tied to geopolitical tensions in the Middle East, as such tensions can impact currency markets and lead to a risk-off mode.

Emerging market stocks and currencies fell on Friday, heading for their second weekly loss, as investors ditched riskier assets after a reported Israeli attack on Iran stoked Middle East tensions. Ratings agency S&P Global downgraded Israel's long-term ratings to A-plus from AA-minus as tensions with Iran heightened. Central banks in South Korea, Vietnam, and Indonesia have indicated they are ready to intervene in their foreign exchange markets to maintain market confidence and stability.

Why this matters: The renewed Middle East tensions could weigh on exports and push up inflation forecasts due to rising oil prices. The Bank of Korea is expected to closely monitor how a weakening won and rising oil prices affect the economy and domestic demand, which will be taken into account when the bank updates its economic forecasts in May.

Global oil prices have been volatile due to the reported Israeli missile strike on Iranian military targets, which could escalate tensions in the region and disrupt oil supply through a key delivery hub. However, the impact on oil supply has been limited so far, as no oil installations appear to have been damaged. Oil prices have risen more than 20% this year due to a resilient global economy, improving demand from China, and OPEC production cuts.

The potential impact of a conflict in the Strait of Hormuz, where a fifth of global oil supplies travel, could be significant. Meanwhile, record U.S. oil production and rising domestic crude stockpiles are easing some of the West's supply concerns. Iran appears to be downplaying the incident, and there are arguments against a wider conflict. The geopolitical backdrop remains uncertain, but so far, the market reaction has been muted.

Rhee emphasized that the Bank of Korea has large foreign exchange reserves and other tools ready to be deployed to respond to any market volatilities. "The won-dollar exchange rate may stabilize if the conflict between Iran and Israel in the Middle East does not escalate into a wider war or a blockade of the Strait of Hormuz," Rhee said. The bank is ready to take steps to stabilize the forex markets if needed, as the renewed Middle East tensions could weigh on exports and push up inflation forecasts due to rising oil prices.

Key Takeaways

  • BOK governor says won-dollar rate may stabilize if Mideast tensions don't escalate.
  • Emerging market stocks and currencies fell due to reported Israeli attack on Iran.
  • BOK, Vietnam, Indonesia ready to intervene in forex markets to maintain stability.
  • Mideast tensions could impact exports, inflation due to rising oil prices.
  • BOK has tools to respond to market volatility, but geopolitical backdrop remains uncertain.