Market Update: Korean gov’t keeps eye on markets as Iran conflict likely to weigh on Korean won – Full Analysis

 

Korea’s government stepped up market monitoring after U.S. and Israeli airstrikes on Iran heightened uncertainty over Middle East oil shipments, raising concerns about higher crude prices and renewed dollar strength that could weigh on the won.

 

In Seoul, the won had been steadily stabilizing from earlier levels near 1,480 to the dollar, moving into the low 1,420s before the weekend’s events. But in early Saturday morning trading, the currency market reflected a jump in risk aversion. The won weakened by 14.2 won to trade at 1,444 against the dollar at 2 a.m. that day on the Seoul foreign exchange market.

 


 

A range of indicators — from crude oil benchmarks to cross-border capital flows — will determine the extent of the conflict’s impact on the won.

 

Brent crude, a global benchmark, had already been trading at elevated levels before the weekend’s strikes, and analysts warn prices could climb further if the conflict endures or if oil transit routes, such as the Strait of Hormuz, are threatened. Iran’s Islamic Revolutionary Guard Corps announced on Saturday that passage through the strait was no longer safe and halted vessel traffic, according to Reuters and AFP on Sunday.

 

The strait is a narrow but critical maritime chokepoint through which roughly 20 to 30 percent of the world’s seaborne oil shipments pass each day. 

 

An aerial view of the Iranian shores and the island of Qeshm in the strait of Hormuz is pictured on Dec. 10, 2023. [REUTERS/YONHAP]

 

If traffic through the strait declines, analysts say the disruption could create a supply shortfall of several million barrels per day. William Jackson, chief economist at Capital Economics, told
Reuters that a prolonged conflict that affects supply could push oil prices to around $100 per barrel, adding 0.6 to 0.7 percentage points to global inflation.

 

Higher oil prices could lift inflation expectations, dampening market hopes for interest rate cuts by the U.S. Federal Reserve. If rate reductions are delayed or scaled back, upward pressure on the dollar could intensify.

 

Concerns about a deterioration in Korea’s overall trade balance, along with increased demand for dollar settlements, could put further strain on the won. A broader shift by global investors toward safe-haven assets could accelerate dollar gains. Korea imports most of its energy, meaning sustained high oil prices could push the dollar-won exchange rate higher.


 

“The U.S. is a net energy exporter and so benefits from higher oil and gas prices that would result from disrupted oil supply,” the Commonwealth Bank of Australia said in a recent report, adding that the dollar is likely to strengthen against most currencies except the Japanese yen and the Swiss franc.

 

Government supporters mourn in a gathering after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, on March 1. [AP/YONHAP]

 

Analysts in Korea warned the won could weaken further if geopolitical risks continue.

 

“Despite heavy foreign selling in the domestic stock market recently, the exchange rate remained relatively stable because supply and demand factors eased somewhat,” said Park Hyoung-joong, an economist at Woori Bank. 

 

“If geopolitical risks persist for an extended period, the [dollar-won] exchange rate could stay elevated or rise further,” Park added.  

 

The government moved quickly to respond the conflict. On Sunday, Finance Minister Koo Yun-cheol convened an emergency meeting with related agencies at the government complex in Seoul and activated a 24-hour monitoring system to track developments in the Middle East, international energy prices and financial market volatility. 

 

Koo stressed that, given Korea’s heavy reliance on energy imports from the Middle East, the government must respond swiftly and proactively to volatility in global energy prices that could result from the instability caused by the closure of the Strait of Hormuz. He urged close monitoring of the operations of Korean-flagged vessels, including oil tankers and LNG carriers navigating near the Middle East, and called for thorough measures to ensure there are no disruptions to the nation’s energy supply.

 

The attendees agreed that Korea has sufficient capacity to respond to a potential supply crisis through its domestic petroleum reserves. However, they noted that volatility in the global financial and energy markets is likely to increase if military tensions in the Middle East persist. The Financial Services Commission said it will quickly roll out a market stabilization program worth 100 trillion won ($69.5 billion) or more if needed.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.

BY KIM WON, JIN MIN-JI [[email protected]]