Won-Dollar Exchange Rate Surpasses '1340 Won' Level... "A Risk Factor for the Korean Economy"

Exchange Rate Approaches This Year's High
Dollar Strengthens Amid Prolonged US Tightening Outlook

On the 16th, when the won-dollar exchange rate rose to the 1,340 won range during the day, an employee was working in the dealing room of Hana Bank in Jung-gu, Seoul.
[Image source=Yonhap News]

The won-dollar exchange rate showed a sharp upward trend, breaking through the 1,340 won level. This is the highest level in about three months. While expectations for a soft landing of the U.S. economy are growing, concerns about 'deflation' are spreading in the Chinese economy, which is interpreted as further strengthening of the dollar.

On the 16th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,340 won, up 9.1 won from the previous trading day. This is the highest level since May 17, when the yearly peak of 1,343 won was recorded.

Recently, the exchange rate has been showing a steep rising trend. After falling to 1,257.3 won intraday on the 18th of last month, it has continued to rise, increasing by more than 82.7 won in a month. On the morning of this day, the exchange rate was moving below 1,340 won after opening, but significant volatility is expected for the time being.

The analysis suggests that the stronger-than-expected U.S. economy and the expanded outlook for prolonged tightening by the U.S. Federal Reserve (Fed) are driving up the won-dollar exchange rate.

The U.S. Department of Commerce announced on the 15th (local time) that retail sales in July increased by 0.7% compared to the previous month, maintaining an increase for four consecutive months. The increase was the highest level in the past six months and significantly exceeded expert forecasts (0.4%).

Strong labor markets and wage increases are supporting consumption, creating an atmosphere where expectations for a soft landing outweigh recession concerns in the U.S. economy. If the U.S. economy remains solid, it becomes difficult for the Fed to shift to rate cuts, so the dollar is likely to show strength.

In particular, the international credit rating agency Fitch downgraded the U.S. sovereign credit rating from the highest triple-A (AAA) to double-A plus (AA+) on the 1st (local time), increasing preference for the dollar as a safe asset in financial markets.

On the other hand, the Chinese economy is showing overall weakness, fueling the dollar's strength.

Retail sales growth in China, which can gauge domestic demand, was only 2.5% year-on-year last month, falling far short of market estimates (4.5%). Industrial production also continued to slow, increasing by 3.7% year-on-year.

The People's Bank of China lowered the policy rate for the one-year Medium-term Lending Facility (MLF) loans from 2.65% to 2.50%, cutting by 0.15 percentage points to supply liquidity. When the MLF rate is lowered, it is common for the Loan Prime Rate (LPR), which acts as the benchmark interest rate, to be lowered as well.

As the U.S. continues its tightening monetary policy, if the interest rate gap between the U.S. and China widens further, the yuan may weaken, which could also increase the depreciation of the won in tandem. The dollar-yuan exchange rate is at 7.32 yuan, also the highest level this year.

Additionally, default concerns triggered by China's large real estate developer Country Garden (Biguiyuan) are stimulating risk-averse sentiment, reinforcing the strong dollar and weak yuan atmosphere.

The won-dollar exchange rate is expected to continue its upward trend for the time being, but intervention concerns from foreign exchange authorities are expected to limit the speed of the rise.

Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "Currently, the won-dollar exchange rate is showing signs of switching to an upward trend along with the strong dollar," adding, "If it rises to the mid-1,300 won range, instability in the stock market and the need for interest rate hikes in monetary policy could become risk factors for the Korean economy."

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