Seoul: The Korean won has seen a period of relative weakness recently, but South Korea is well-prepared to handle external financial shocks with its ample dollar liquidity, according to Shin Hyun-song, the nominee for the head of South Korea's central bank. Shin addressed these issues during a confirmation hearing at the National Assembly in Seoul, as he is set to succeed outgoing Bank of Korea (BOK) Governor Rhee Chang-yong.

According to Yonhap News Agency, Shin commented on the exchange rate dynamics, stating, "It is not appropriate to comment on the specific level, but it is true that the (won-dollar) exchange rate has remained at a fairly high level over the past few months." He emphasized that excessive currency depreciation is undesirable, but reassured that the country's foreign exchange reserves are sufficient to buffer external shocks.

Shin highlighted that offshore transactions have significantly impacted the won's weakness, noting a "tail wagging the dog" phenomenon where offshore non-deliverable forward (NDF) trading has played a crucial role in depreciating the currency. He expressed his intent to promote the global use of the won and build an offshore settlement system to better manage the exchange rate and enhance the currency's international standing.

The Korean won had been trading around the critical 1,500 won-per-dollar mark before easing to approximately 1,450, affected by geopolitical tensions in the Middle East that drove up global oil prices and unsettled global markets. On the matter of BOK's monetary policy direction, Shin stated, "It is too early to move decisively in one direction," describing the central bank's recent decision to maintain steady rates as a strategy of "strategic patience."

Shin underscored the importance of price stability in monetary policy, acknowledging that continued Middle East risks may necessitate monetary policy action. In its latest rate-setting meeting, the BOK maintained its benchmark rate at 2.5 percent, adopting a cautious approach amidst rising uncertainties impacting inflation, currency stability, and growth.

Discussing the balance between inflation and growth, Shin indicated that inflation takes precedence due to South Korea's sensitivity to oil prices and the potential substantial impact of oil shocks. He assessed the likelihood of stagflation-simultaneous inflation and economic downturn-as low, citing that for stagflation to occur, growth would need to turn negative. While overall growth may be weaker than initially anticipated, strong semiconductor performance and a supplementary budget are expected to mitigate downward pressures.

Shin concluded on an optimistic note, stating that South Korea's potential growth remains promising over the long term, thanks to its strong technological capabilities and favorable position to capitalize on the transformation driven by artificial intelligence (AI).