Exchange Rate Surge, Bank of Korea Mistake?..."Volatility Expected to Ease After March"

South Korea Holds Interest Rates Steady, but US Rate Hike Outlook Rises
Exchange Rate Surpasses 1300 Won, Foreign Capital Outflow
However, Volatility Expected to Ease After March
US Economic Slowdown Makes Prolonged 'King Dollar' Unlikely

Concerns are rising that the Korean economy is being cornered as the won-dollar exchange rate surpasses 1,300 won and foreign investors' capital outflows increase following the Bank of Korea's decision to keep the base interest rate unchanged. The Bank of Korea has effectively sent a signal to the market that 'the tightening phase is nearing its end,' while the U.S. Federal Reserve (Fed) has voiced intentions to prolong tightening, making volatility in the domestic foreign exchange and capital markets inevitable.

However, some experts believe that the U.S. tightening and the 'King Dollar' phenomenon are unlikely to persist for long, and the market is expected to gradually stabilize as early as this month. If international oil prices stabilize and the semiconductor industry recovers as the Bank of Korea forecasts, exports could rebound, leading the won to strengthen again. Expectations that U.S. inflation and employment indicators will show a slowdown also support this analysis.

Korea Holds Rates, U.S. Raises... Exchange Rate Rises and Capital Outflows

According to the Seoul foreign exchange market on the 2nd, the won-dollar exchange rate opened at 1,306.5 won, down 16.1 won from the previous trading day. Although this is lower compared to the rapid rise last week when it surpassed 1,320 won, it remains high compared to the early last month when it was in the 1,200 won range. Since senior Fed officials have recently continued to emphasize the need for additional rate hikes, the dollar is likely to remain strong for the time being, pushing the won-dollar exchange rate upward.

In fact, the 10-year U.S. Treasury yield, a benchmark for market interest rates, briefly exceeded 4% during trading on the 1st (local time), marking the first time since November last year. The 2-year Treasury yield also approached 4.9%, reaching its highest level since July 2007. This is based on the assessment that U.S. employment and consumption remain robust and inflation shows a 'sticky' pattern, suggesting the Fed may raise the base interest rate further. According to the Chicago Mercantile Exchange (CME) Group's FedWatch, the projected terminal rate for the U.S. has been revised upward from 5.50% to 5.75%.

If the dollar strengthens further due to prolonged U.S. tightening and the won-dollar exchange rate continues to rise, instability in the domestic foreign exchange and capital markets will increase. Foreign investors have already been net sellers of Korean stocks since the 24th of last month, following signals of Korea's rate freeze and U.S. rate hikes. The net selling volume over three days reached 913.9 billion won. As concerns grow, the foreign exchange authorities recently held the first foreign exchange soundness consultation meeting of the year to check foreign currency liquidity.

"Stabilization Expected from March... Won Value to Rebound"

However, there is also analysis inside and outside the market that the current market instability will gradually decrease from March. Although the dollar may strengthen in the short term due to Fed tightening expectations, considering the U.S. economic downturn and Korea's export recovery prospects, the won-dollar exchange rate is unlikely to continue rising steadily. Seunghyuk Kim, a researcher at NH Futures, said about this month's foreign exchange market, "The won-dollar exchange rate will face upward pressure due to the high inflation situation in the U.S.," but added, "The extent of the rise in March will not reach that of February."

Signals that U.S. housing and inflation rates are gradually slowing down are also factors that could lower the exchange rate in the mid to long term. Jaehwan Heo, a researcher at Eugene Investment & Securities, said, "Although the U.S. housing price inflation has not yet fallen, considering the slowdown in the Zillow rental index, it is highly likely to decelerate rapidly after the first quarter," adding, "Service prices, which are closely related to wages, have also passed their peak, and the supply-demand imbalance in the labor market is gradually easing."

Furthermore, the stabilization of international oil prices and China's economic recovery could improve Korea's terms of trade, which is another factor supporting won strength. If the economy improves in the second half of this year as forecasted by the Bank of Korea and the government, leading to better export performance and profitability for companies, it could positively impact not only the won-dollar exchange rate but also the domestic stock market. Amin Kwon, a researcher at NH Investment & Securities, explained, "(Domestic terms of trade) are unlikely to worsen further," and "The future direction of the economy and terms of trade will be favorable for the won's value."

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