The KRW is also sensitive to changes in global investor sentiment proxied by the VIX index. Such pressure on capital outflows can exert depreciation pressure on the exchange rate. markets in search of safe assets and higher yields. and Korea widens, investors tend to move money to U.S. When the three-year interest rate differential between the U.S. ![]() Overall, our results suggest that interest rate differentials, changes in risk perception, and the performance of the Korean equity market have more significant impacts on the USD/KRW than the current account balance. ![]() In the AMRO 2022 Annual Consultation Report on Korea, we used a vector autoregression (VAR) model and a historical decomposition over a sample of 1999-2022 to estimate the impact and contribution of each factor on the movements of the KRW against the USD. In this context, it is imperative to first understand the underlying economic drivers of the KRW/USD exchange. However, excessive foreign exchange rate volatility could have negative impacts on the Korean economy given that many Korean manufacturers have a global footprint and Korea has become a creditor country. Given Korea is an open economy with deep integration into the global supply chains and a high degree of free flow of capital, the KRW is naturally sensitive to the shift in global economic and financial conditions. The KRW depreciated against the USD by 17.4 percent in late October 2022 at the peak and by 6.0 percent at the end of December 2022, compared with the end of December 2021. dollar (USD) strengthened following the hawkish policy stance of the U.S. ![]() economy emerged from the pandemic and the U.S. During 2022, the Korean won (KRW) exchange rate was highly volatile as the U.S.
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