Won-Dollar Exchange Rate Stabilizes Downward... Expected to Reach Early 1200s in Second Half (Comprehensive)

If US Tightening and China's Economic Uncertainty Clear Up,
Some See 1230 Won Range as the Bottom in the Second Half

Recently, the KRW-USD exchange rate has been tracing a downward curve, attempting to stabilize in the 1,200 KRW range. Although the possibility of additional interest rate hikes by the U.S. Federal Reserve (Fed) remains, the expectation that the rate hike cycle is coming to an end has led to a weakening of the U.S. dollar. Experts predict that the KRW-USD exchange rate will fluctuate around the mid-1,200 KRW range this month, and as uncertainties regarding further Fed rate hikes gradually dissipate, it is expected to fall to the low 1,200 KRW range in the second half of the year.

According to the Seoul foreign exchange market on the 19th, the KRW-USD exchange rate, which was 1,321.6 KRW at the beginning of this month, fell to 1,271.9 KRW (closing price) on the 16th, showing a downward stabilization trend. On that day, the exchange rate opened at 1,278.0 KRW, up 6.1 KRW from the previous trading day's close, but it has maintained the 1,200 KRW range for seven consecutive trading days.

The reason the KRW-USD exchange rate is showing a downward trend is that the possibility of the U.S. ending its rate hikes in the second half of the year has gained attention, strengthening the view that the dollar will weaken in the medium to long term. The Fed paused its ten consecutive rate hikes that began in March last year at last week's Federal Open Market Committee (FOMC) meeting and kept the benchmark interest rate unchanged, taking a 'breather.' At the same time, it raised the median estimate for the terminal rate this year to 5.6%, suggesting that it could raise rates twice more this year. However, the market is skeptical of the Fed's rate outlook, and the stock market continues to rise daily.

Experts forecast that although uncertainties in U.S. monetary policy, yuan weakness, and trade deficit remain variables, the medium- to long-term trend will continue to be a decline in the KRW-USD exchange rate. Changseop Oh, a researcher at Hyundai Motor Securities, said, "Market expectations are growing that the Fed will implement its final rate hike at the FOMC meeting next month and that monetary tightening will end," adding, "This month, the exchange rate will move around the mid-1,200 KRW range and could fall to the low 1,200 KRW range in the second half of the year." The continued net buying by foreigners in the domestic stock market is also contributing to the exchange rate decline. Oh said, "As foreign investment funds continue to flow into the domestic stock market, the supply and demand situation is improving, which is a factor strengthening the won," adding, "With risk asset preference revived, demand for the won, classified as a risk currency, is also continuing."

U.S. Rate Hikes, South Korean Export Recovery, and Japanese Monetary Policy: 'Exchange Rate' Variables

Although domestic export sluggishness and the trade deficit trend continue, the expectation that exports will improve in the second half of the year also supports the decline in the exchange rate. Sanghyun Park, a researcher at Hi Investment & Securities, said, "Since the trade deficit peaked in January, the decline in exports has not expanded further and is shrinking," adding, "If export prices recover through a full-scale production cut of key export items such as semiconductors in the second half, we can expect an improvement in the domestic export economy and a turnaround to a trade surplus, which could lead to a decline in the exchange rate." Park predicted, "As uncertainties over U.S. rate hikes are resolved, the exchange rate will show a gradual downward trend. Although there will be temporary fluctuations, the exchange rate could fall to the 1,230 KRW range in the second half of the year."

However, factors such as the pace of U.S. inflation slowdown and China's economic recovery will be major determinants of the KRW-USD exchange rate direction. Park said, "One more U.S. rate hike may not have a significant impact, but if U.S. inflation remains unchecked and monetary tightening intensifies, it could pose a risk," adding, "If concerns over the latent U.S. commercial real estate market materialize, the dollar could strengthen." Also, although the KRW-CNY exchange rate has recently shown a decoupling phenomenon, if the pace of domestic export recovery due to China's economic improvement is slower than expected, it could negatively affect the exchange rate.

Japanese monetary policy by the Bank of Japan (BOJ) is another variable to watch. On the 16th, the BOJ held a monetary policy meeting and kept the short-term interest rate at minus (-0.1%) and maintained the 10-year government bond yield, a long-term rate indicator, at around 0%. However, if the BOJ ends its accommodative monetary policy in the future, the yen could strengthen, which would act as a factor strengthening the won.

Meanwhile, on the same day, the KRW-JPY exchange rate entered the 800 KRW per 100 yen range for the first time in eight years. As of 8:23 a.m., the KRW-JPY revaluation rate recorded 897.49 KRW per 100 yen and is currently fluctuating in the low 900 KRW range. The KRW-JPY exchange rate entering the 800 KRW range is the first time since June 2015, eight years ago.

[Image source=Yonhap News]

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