Soaring Exchange Rate... Economic Research Institute Raises Forecast to 1300 Won

Possibility of Fed 'Giant Step'
Intraday High in 2 Years and 2 Months
Weakening Won and US-Korea Interest Rate Inversion Expected
Concerns Over Capital Outflow Increase
Measures Like Currency Swap Needed

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jeong] The won-dollar exchange rate is soaring as concerns over tightening intensify amid expectations that the U.S. Federal Reserve (Fed) will continue its ‘big step’ policy to curb inflation. With the prolonged Ukraine crisis and the acceleration of U.S. interest rate hikes, major domestic economic research institutes have revised their forecasts, raising the upper limit of the exchange rate to 1,300 won in the first half of the year.

According to the Seoul foreign exchange market on the 9th, the won-dollar exchange rate, which opened at 1,272.0 won, surged to 1,276.6 won in the morning and has been fluctuating since. This is the highest level in about two years and two months based on the intraday peak, as the possibility of the Fed implementing a ‘giant step’ hike of up to 0.75 percentage points at once has resurfaced, expanding the upward movement.

As exchange rate volatility increases, major economic research institutes have significantly raised their upper limits and revised their annual forecasts. On the same day, the Korea Economic Research Institute raised its forecast for the average annual won-dollar exchange rate this year to 1,255 won. This is an increase of 85 won from the 1,170 won forecast made at the end of last year. The upper limit for the exchange rate in the first half of the year was also raised to between 1,290 and 1,295 won.

Lee Seung-seok, a senior researcher at the Korea Economic Research Institute, said, "The forecast released last year was before the outbreak of the Ukraine crisis," adding, "The 1,255 won forecast is based on the assumption that the economic impact of the Ukraine crisis will gradually stabilize in the second half of the year. However, if the Ukraine crisis continues and the capital market impact extends into the second half, the exchange rate could rise to 1,295 won in the short term."

In the foreign exchange market and economic circles, there are also forecasts that the won-dollar exchange rate will exceed 1,300 won in the first half of this year. Jung Min, a researcher at Hyundai Research Institute, said, "Due to the rapid U.S. interest rate hikes, high inflation, and geopolitical conflicts, demand for the dollar is increasing, intensifying the won’s depreciation," adding, "The upper limit of the exchange rate should be set at 1,300 won." He also said, "Concerns over capital outflows are growing as the won’s depreciation is accompanied by expectations of interest rate inversion," and added, "A Korea-U.S. currency swap is necessary to reduce volatility in the financial market and secure stability."

Jung Kyu-chul, head of economic forecasting at the Korea Development Institute (KDI), also said, "As the Fed’s monetary policy normalization is in full swing and the U.S. economic recovery continues, while Korea’s growth rate is relatively slowing, the won-dollar exchange rate is expected to rise compared to last year," and assumed, "The recent high level will continue for a considerable period."

This content was produced with the assistance of AI translation services.