[Why&Next] Exchange Rate Fluctuations Amid US-China Risks... Hovering Around 1350 Won

US Tightening Expected to Continue... Dollar Strengthens
Focus on Fed Chair Powell's Speech at Jackson Hole Meeting
Volatile Market Conditions to Persist for Now

Risks originating from China and the intensity of U.S. monetary tightening have emerged as the biggest variables determining the direction of the won-dollar exchange rate in the second half of the year. At the beginning of the year, expectations that the U.S. interest rate hike cycle would end grew, leading to a prevailing view that the dollar would gradually weaken and the won-dollar exchange rate would stabilize downward. However, as the Chinese real estate crisis spreads and recent forecasts suggest that the U.S. benchmark interest rate may remain higher for longer, concerns are rising that a strong dollar era may return.

According to the Seoul foreign exchange market on the 25th, as of 9:12 a.m., the won-dollar exchange rate rose by 3.8 won from the previous day to 1,326.4 won. The rate opened at 1,328.5 won, up 5.9 won from the previous day, and has been fluctuating in the mid-1,320 won range in the early trading hours. The dollar is showing strength as U.S. employment data was reported to be robust, raising expectations that the Federal Reserve's tightening may last longer.

Focus on Fed Chair Powell's Speech at Jackson Hole Meeting

The market expects the won-dollar exchange rate to be significantly influenced by the content of Federal Reserve Chair Jerome Powell's speech at the annual economic symposium, the Jackson Hole Meeting, held in Wyoming, U.S., on the 25th. Recently, the U.S. has been caught in a 'high-growth dilemma.' Although U.S. inflation is showing signs of slowing, growth rates have risen more than expected, making it difficult to slow the pace of tightening. A persistently strong labor market is another factor preventing the Fed from easing its tightening pace. According to the U.S. Department of Labor, new unemployment claims for the week of the 13th to 19th totaled 230,000, down 10,000 from the previous week, marking a second consecutive week of decline.

Seunghyuk Kim, a researcher at NH Futures, said, "The robust U.S. employment data can serve as a justification for further rate hikes, exerting upward pressure on the exchange rate," adding, "Market betting continues based on psychological calculations regarding Chair Powell's remarks at the Jackson Hole Meeting." Due to caution surrounding the Jackson Hole Meeting, the exchange rate is expected to fluctuate in the high 1,320 won range today, with the won-dollar rate likely to remain sideways depending on U.S. economic indicators.

Researcher Kim also noted, "There is heated debate recently about the structural changes in the U.S. leading to an upward revision of the neutral interest rate. If the neutral rate rises, real interest rates must increase further to create a tightening environment, so market attention will focus on how long the tightening situation will last." The neutral interest rate refers to the rate at which the economy grows at its potential growth rate without overheating or recession. The possibility of a rising neutral rate in the U.S. implies that high interest rates may persist for a long time.

Experts predict that the won-dollar exchange rate will rise to around 1,350 won in the second half of the year. Researcher Kim said, "Although pressure for U.S. rate hikes will continue for the time being, there is disagreement about whether the U.S. economy will remain as strong as it is now," and forecasted, "The won-dollar exchange rate will continue to experience volatility depending on the degree of U.S. tightening, before expanding its downward movement in the second half."

Renewed Preference for Safe Assets Amid China Risks

Another major variable for the exchange rate is the risk from China. Baek Seokhyun, an economist at Shinhan Bank, said, "As China risks triggered by real estate gradually spread, a preference for safe assets may reemerge," adding, "The won's depreciation phase could last longer than initially expected." Economist Baek noted, "The U.S.'s high-growth dilemma and China's low-growth dilemma are colliding, increasing market uncertainty," and predicted, "The timing of exchange rate stabilization will depend on when consensus is reached on the end of U.S. rate hikes and the direction of resolving China risks." The exchange rate forecast band he suggested for the second half is between 1,290 won and 1,360 won. Changseop Oh, a researcher at Hyundai Motor Securities, said, "Although the won's correlation with the yuan has weakened compared to the past, it has recently shown a trend of re-aligning with China's economic slowdown," and forecasted, "Expectations for downward stabilization at the beginning of the year are temporarily on hold, and a volatile market is likely to continue for a considerable period depending on the direction of China risks."

On the previous day, Lee Changyong, Governor of the Bank of Korea, addressed concerns about volatility in the won-dollar exchange rate, saying, "The current situation is not something to be overly concerned about," and explained, "The recent rise in the exchange rate is due to the dollar strengthening and the yuan and yen weakening." He added, "More important than the interest rate gap between Korea and the U.S. is whether the U.S. will continue its tightening stance. If the Fed announces a final rate much higher than market expectations, the market could experience significant volatility," and said, "If such a possibility arises, it will be necessary to reduce that volatility through not only interest rates but also various micro-level market interventions."

On the 22nd, the won-dollar exchange rate started on a downward trend, while stocks such as the KOSPI began on an upward trend. Dealers are conducting foreign exchange operations in the dealing room of Hana Bank in Myeongdong, Seoul. Photo by Younghan Heo younghan@

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