Chaos in KOSPI... Concerns Over 'King Dollar' Amid Record High Exchange Rates

Won-Dollar Exchange Rate Hits Highest in 13 Years 4 Months
KOSPI Falls Below 2500
Lack of Sustained Upward Momentum
Market Likely to Remain Cautious Ahead of Jackson Hole Meeting

[Asia Economy Reporter Minji Lee] As concerns grow over the Federal Reserve's (Fed) tightening moves, uncertainty in the domestic stock market is expanding ahead of the Jackson Hole Meeting and the Bank of Korea's Monetary Policy Committee (MPC) meeting. In particular, the won-dollar exchange rate, which surpassed its previous high last week, hit its highest level in 13 years and 4 months on the day, contributing to the decline of the KOSPI.

At 9:50 a.m. on the 22nd, the KOSPI was trading at 2,463.59, down 1.17% from the previous trading day. This is a 7% drop from this month's peak of 2,533.52 (on the 16th). The KOSPI seemed to be attempting to settle above the 2,500 level after a 10% surge from 2,305.42 on the 1st of last month, but it failed to hold the 2,500 mark as concerns over tightening intensified around the release of the July FOMC (Federal Open Market Committee) minutes. As concerns over a global economic recession grew and the strong dollar trend strengthened, downward pressure on the KOSPI increased.

While expectations of an inflation peak were positive for the index, the main reason was the lack of factors to drive a sustained upward trend. After the release of the July FOMC minutes, the market heightened caution regarding the pace and intensity of monetary policy, lowering expectations for a 'Fed pivot.' Lee Kyung-min, a researcher at Daishin Securities, analyzed, "As excessive expectations for monetary easing, which began with employment surprises and easing inflation, diminished, the consensus was adjusted to a rate cut in May next year (previously March). The minutes were interpreted somewhat hawkishly, causing short-term volatility."

Deterioration of fundamentals centered on Europe and China stimulated the strong dollar and influenced the KOSPI's decline. In the UK and Europe, natural gas prices have soared to unprecedented levels, raising concerns about stagflation, where economic slowdown and inflation coexist. In China, the increase in COVID-19 cases and manufacturing indicators falling far below market expectations have strengthened forecasts of an economic recession. A strong dollar inevitably leads to reduced trade volume and won depreciation, with the market analyzing that the won-dollar exchange rate could surge to 1,350 won.

This week, the KOSPI is expected to have limited upside ahead of the Jackson Hole Meeting (25th-27th). This is because the Fed is likely to send a warning message to the market, which has already priced in expectations for rate cuts. Kim Jang-yeol, Managing Director at Sangsangin Securities, said, "If the Fed implies at the Jackson Hole Meeting that it wants the strong dollar to persist for the time being, the stock market will confirm the end of the summer rally," adding, "This could lead to increased caution ahead of the FOMC on September 20-21." On the 25th, ahead of the MPC meeting, the Bank of Korea is expected to end big-step hikes and raise rates by 25 basis points (1bp = 0.01 percentage points) reflecting recession concerns.

Market experts say it will be difficult for the tech stock rally, which had driven the index up, to be repeated anytime soon. Son Joo-seop, a researcher at Cape Investment & Securities, explained, "At major events such as the FOMC, the tendency to defend against risks has strengthened, highlighting the rise of dividend and value stocks," and added, "This week, the desire to reduce risk will intensify, improving investor sentiment toward these stocks."

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