[Why&Next] Won-Dollar Exchange Rate Swings Over 10 Won in a Day... Year-End Downward Pressure

Fluctuating with US Economic Indicators
Volatile Market Expected to Continue for Now
Upper Limit Raised to 1400 Won

The won-dollar exchange rate has been experiencing fluctuations of more than 10 won in a single day due to U.S. economic indicators, increasing instability in the foreign exchange market. Experts have adjusted the upper band of the won-dollar exchange rate upward for the second half of the year as U.S. Treasury yields surged amid prolonged U.S. monetary tightening. However, they also expect downward pressure to increase toward the end of the year. For the time being, amid ongoing economic uncertainty, volatility is expected to continue with the exchange rate reacting sensitively to U.S. economic data.

According to the Seoul foreign exchange market on the 5th, the won-dollar exchange rate closed at 1,350.5 won, down 13.0 won from the previous trading day. After soaring 14.2 won to close at 1,363.5 won on the 4th, marking the highest level in 11 months, the exchange rate plunged more than 10 won in just one day, swinging between extremes.

Exchange Rate Plummets in One Day Due to Slowing U.S. Employment Data

The exchange rate, which had been on a high-rise, stopped its upward trend after the overnight release of U.S. employment data by Automatic Data Processing (ADP) significantly missed expectations. U.S. September ADP private employment increased by only 89,000, far below the expected 150,000 and the previous month's 180,000. The Institute for Supply Management (ISM) also reported that the U.S. September Non-Manufacturing (Services) Purchasing Managers' Index (PMI) was 53.6, down from 54.5 the previous month.

Seunghyuk Kim, a researcher at NH Futures, said, "The U.S. ADP employment data has shown a decline for four consecutive months recently, and the employment market is showing cooling signals across all sectors of goods and services industries." He added, "Reflecting the employment and services PMI results, yields on 2-year and 10-year U.S. Treasury bonds have fallen, partially reversing their previous rise, and the previously soaring won-dollar exchange rate is now under downward pressure."

[Image source=Yonhap News]

Experts foresee that volatility in the foreign exchange market will intensify for the time being amid ongoing economic uncertainty. Although the rise in U.S. Treasury yields, which surged due to slowing U.S. employment data, has somewhat eased and the strong dollar is gradually weakening, caution remains as the upward momentum could revive depending on future economic indicators.

Volatile Market Expected for the Time Being... Both Upward and Downward Possibilities Open

With volatility expected, the market is keeping both upward and downward possibilities for the won-dollar exchange rate open. NH Futures raised the upper forecast limit to 1,400 won on the 4th, when the exchange rate surpassed the 1,360 won level and hit a yearly high. Researcher Kim said, "As the won's concentration phenomenon accelerates, the exchange rate first broke through the previous upper band of 1,360 won and then adjusted the upper limit to 1,400 won, which was previously suggested as the second resistance level." He added, "The recent strong dollar trend may continue for the time being until the Fed's stance changes in response to U.S. economic changes toward the end of the year."

Shinhan Investment Corp. also revised its won-dollar exchange rate forecast for the second half of the year at the end of last month. The upper limit was raised from 1,350 won to 1,370 won, and the lower limit from 1,250 won to 1,270 won. This adjustment was made amid concerns over prolonged high U.S. interest rates led by the U.S., with U.S. Treasury yields soaring and the dollar showing a sharp rise. Chanhee Kim, a researcher at Shinhan Investment Corp., explained the upward revision by saying, "U.S. economic indicators have repeatedly surprised, supporting a strong dollar backed by fundamental optimism."

Experts expect the won-dollar exchange rate to show volatility for the next month or two but anticipate that downward pressure will increase toward the end of the year. Signs of slowing U.S. employment and consumption indicators and some degree of anticipation of prolonged Fed tightening have already been factored in. Researcher Chanhee Kim said, "If the U.S. September nonfarm payrolls data, to be released on the afternoon of the 6th, shows a greater slowdown than expected, it could trigger a weak dollar." He added, "Considering September U.S. credit card transactions, domestic demand slowdown pressures are expanding, and in the fourth quarter, the dollar could face increased downward pressure as this fundamental weakness is confirmed."

Another reason for expecting a decline in the exchange rate is the outline of an IT-centered export recovery revealed through September export-import data. Researcher Kim said, "Improvement in the won's fundamentals linked to the manufacturing sector's recovery supports a decline in the won-dollar exchange rate," adding, "The overshooting range in the mid-to-high 1,300 won level could be resolved within one to two months along with a shift to a weaker dollar."

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