FKI "USD-KRW Rate Expected to Rise to 1434 Won Due to US-Korea Interest Rate Inversion"

Vulnerable Financial Defense Hinders Aggressive Interest Rate Hikes
Active Foreign Exchange Management Measures Needed Focused on Trade Balance

[Asia Economy Reporter Park Sun-mi] As the United States implemented a giant step by raising the benchmark interest rate by 0.75 percentage points, the won-dollar exchange rate is increasingly likely to rise to 1,434 won as early as next month.

On the 22nd, the Korea Economic Research Institute analyzed the impact of changes in the Korea-US benchmark interest rate differential on the exchange rate, stating that with this giant step by the US, the US interest rate has become 0.625 percentage points higher than Korea’s, causing an inversion of the benchmark interest rates between Korea and the US, which could immediately affect the exchange rate.

The institute forecasted that even if the Bank of Korea’s Monetary Policy Committee takes a baby step (raising the benchmark interest rate by 0.25 percentage points) or a big step (raising the benchmark interest rate by 0.5 percentage points) in October, the benchmark interest rate gap between Korea and the US will remain between 0.125 and 0.375 percentage points, so the inversion of benchmark interest rates will continue for the time being.

Accordingly, the exchange rate, which surged sharply from 1,202.4 won per dollar at the beginning of the year to 1,347.5 won in August, is expected to have a high possibility of further increase. If the change in the US benchmark interest rate compared to the same month last year is 1 percentage point larger than that of Korea, the won-dollar exchange rate’s rate of increase could rise by an additional 8.4 percentage points, making the exchange rate rise even steeper.

The institute estimated that if the Bank of Korea raises the benchmark interest rate by 0.25 percentage points, the exchange rate increase rate in October will steepen to 22.4% compared to the same month last year, and the won-dollar exchange rate could further rise to 1,434.2 won. Even if the Monetary Policy Committee implements a big step (raising the benchmark interest rate by 0.5 percentage points), the gap in the magnitude of interest rate hikes between Korea and the US will still widen by 0.75 percentage points, so the exchange rate increase rate in October is expected to be 20.3% compared to the same month last year, with the exchange rate reaching 1,409.6 won.

Choo Kwang-ho, head of the Economic Policy Office at the Korea Economic Research Institute, said, “Recently, the private sector’s financial resilience is weak, making it difficult for the Bank of Korea to follow the US’s aggressive interest rate hikes,” and emphasized, “To ease the exchange rate upward pressure caused by the inversion of benchmark interest rates between Korea and the US, urgent foreign exchange market stabilization measures focused on managing the trade balance, such as enhancing companies’ export competitiveness and resolving raw material supply difficulties, must be prepared.”

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