Before US Interest Rate Hike, Exchange Rate Volatility Rises... Concerns Over Spread of 'Offshore Speculation'

FOMC Meeting Results Announced Early Morning on the 22nd
Strong Dollar Intensifies Ahead of US Interest Rate Hike
Concerns Over Sharp Exchange Rate Rise if Hawkish Remarks Increase
Volatility Rises Amid Offshore Speculation Expansion
Foreign Exchange Authorities May Struggle to Defend 1400 Won Level

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is speaking at a press conference held in Washington DC, USA, on July 27 (local time). [Image source=Yonhap News]

With the U.S. Federal Reserve (Fed) monetary policy decision just a day away, the dollar's strength is intensifying again, increasing market anxiety. Although foreign exchange authorities are strongly committed to defending the won-dollar exchange rate below 1,400 won, concerns are rising that if Fed Chair Jerome Powell delivers more hawkish (monetary tightening-preferred) remarks than expected, the combination of increased dollar preference and offshore market speculation could cause the exchange rate to surge sharply.

According to the Seoul foreign exchange market on the 21st, the won-dollar exchange rate started at 1,389 won, down 0.5 won from the previous trading day, and rose above 1,390 won during the session. Due to strong intervention by foreign exchange authorities, the 1,400 won level is not immediately threatened, but with the Fed’s Federal Open Market Committee (FOMC) regular meeting approaching and the dollar index surpassing 110, domestic and international financial market instability appears to be increasing.

The Fed is expected to implement a 'giant step' by raising the benchmark interest rate by 0.75 percentage points as the market anticipates, but depending on the message from Chair Powell that will follow, global financial markets could once again be shaken. If Powell hints at another large rate hike, as he did at the 'Jackson Hole Economic Policy Symposium' held at the end of last month, the dollar’s value could soar and major stock markets worldwide could plunge.

In this case, the won-dollar exchange rate could experience even greater volatility with the addition of offshore speculative forces. Overnight, the one-month won-dollar Non-Deliverable Forward (NDF) traded in the offshore New York market closed at 1,391.3 won, again surpassing the 1,390 won level. The won is considered the currency with the clearest synchronization between the offshore NDF market and the onshore spot market, and the NDF market is active not only for hedging purposes but also for speculative trading.

Traders are conducting their work on the floor of the New York Stock Exchange (NYSE) in the United States. [Image source=Yonhap News]

Foreign exchange authorities have not explicitly commented on the proportion of offshore speculation, but the market views the recent speculative overshooting (temporary sharp rise) as strong compared to South Korea’s economic fundamentals. Kim Seung-hyuk, a researcher at NH Futures, explained, "Our CDS premium is stable, and short-term dollar supply and foreign exchange reserves are not bad, so the extent of the exchange rate rise is more due to speculative factors than fundamentals."

A Bank of Korea official said, "(The NDF market) involves exchanging the difference, so speculative factors are certainly significant," adding, "If exchange rate volatility increases, both speculation and hedging can expand, so we are monitoring the situation."

Until the FOMC results are announced, the exchange rate is expected to show heavy movement in the 1,390 won range, influenced simultaneously by foreign exchange authorities’ intervention vigilance and won weakness due to U.S. tightening fears, but uncertainty remains. Researcher Kim said, "If Chair Powell makes stronger remarks, saying that next year’s rate hikes will be at a similar level, it could become difficult to keep the upper limit at 1,400 won, but if the hawkish level is as expected, breaking through 1,400 won in the short term may be difficult."

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