The Won-Dollar Exchange Rate Hits a Three-Month High... Forecast to Surpass 1,340 Won

Dollar Strength, Yuan Weakness... Won Depreciation Widens
Exchange Rate Faces Both Upward and Downward Factors... Upper Range at 1340 Won
Bank of Korea Considers Monetary Policy Ahead of Next Week's Monetary Policy Committee Meeting

Ahead of next week's Bank of Korea Monetary Policy Committee decision on the base interest rate, the won-dollar exchange rate is showing a sharp upward trend. Amid significant economic uncertainties in the second half of the year, concerns are rising that instability in the foreign exchange and financial markets may expand as the Korean won also weakens.

According to the Seoul foreign exchange market on the 14th, the won-dollar exchange rate opened at 1,331 won, up 6.1 won from the previous trading day, and has been fluctuating around the 1,330 won level. The exchange rate reaching the 1,330 won range is the first time in about three months since May 19 (1,336 won), which was the previous peak.

The recent weakness of the won is the result of a combination of factors, including dollar strength due to uncertainty over the end of U.S. monetary tightening and weakness in the Chinese yuan. Last month, the U.S. Consumer Price Index (CPI) rose 3.2% year-on-year, lower than market expectations, but the Producer Price Index (PPI) increased by 0.8%, expanding from the previous month, which added to market confusion.

Opinions among U.S. Federal Reserve (Fed) officials are divided on whether to maintain a tight monetary policy going forward. Patrick Harker, President of the Philadelphia Fed, said last week, "We are at a point where we can patiently maintain interest rates steadily," whereas Fed Governor Michelle Bowman pointed out, "Additional hikes are necessary to bring inflation down to the target."

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability that the Fed will hold the base interest rate steady next month is 88.5%. Although the outlook for a rate hold is overwhelmingly high, it has slightly decreased from 90% the previous day.

The recent sluggishness of the Chinese economy is also fueling the rise in the won-dollar exchange rate. Last month, China's CPI and PPI fell by 0.3% and 4.4% year-on-year, respectively, increasing concerns about deflation. As a result, the yuan has weakened, and the won has followed suit.

However, the fundamental cause is the weakening of South Korea's economic fundamentals, such as sluggish exports. According to the Korea Customs Service, the trade balance from the 1st to the 10th of this month showed a deficit of 3.014 billion dollars. After recording a deficit for 15 consecutive months until May, South Korea posted a surplus in June and July but is again facing the possibility of a deficit. Given the poor condition of the Chinese economy, it is difficult to expect a significant improvement in the trade balance in the second half of the year.

[Image source=Yonhap News]

Experts predict that exchange rate volatility will remain high until clear economic indicators supporting price stability in the U.S. or statements from the Fed emerge. If expectations for U.S. tightening weaken, the exchange rate could fall below the 1,300 won level again; otherwise, a short-term breakthrough of the 1,340 won level is possible.

Park Su-yeon, a researcher at Meritz Securities, explained, "If we simply assume that the won-dollar exchange rate has risen only as much as the increase in the dollar index since August, the won could appreciate to 1,287 won," but added, "If safe-haven asset preference dominates, the won could depreciate further, reaching the May high of 1,345 won."

Excessive exchange rate increases could also become an obstacle for the Bank of Korea in conducting monetary policy. The Bank of Korea, which has held the base interest rate steady for four consecutive times since February, is likely to maintain the rate at the Monetary Policy Committee meeting on the 24th. However, if the won-dollar exchange rate shows instability similar to last year, the Bank may have to consider additional hikes.

Bank of Korea Governor Lee Chang-yong said at a press conference on the 13th of last month, "All six Monetary Policy Committee members have left open the possibility of raising the rate to 3.75% for the time being," explaining that "there is still great uncertainty about how many times the U.S. Fed will raise rates, and we need to observe how our foreign exchange market will respond accordingly."

Kim Seung-hyuk, a researcher at NH Futures, explained, "The recent breakthrough of West Texas Intermediate (WTI) crude oil above $80 per barrel raises concerns about higher energy prices, and strong U.S. Treasury yields have created a psychologically strong dollar atmosphere," adding, "Yuan weakness and settlement demand will also contribute to further exchange rate increases."

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