"Settling Around 1,200 Won?" Won-Dollar Exchange Rate Enters Stabilization Phase... Is the King Dollar Era Ending?

Dollar Weakness on Interest Rate Cut Expectations
Variables Include US Elections and China's Growth

The won-dollar exchange rate has been fluctuating around the 1300 won level toward the end of the year, maintaining a range-bound market. With no significant events remaining this year, downward pressure on the exchange rate is expected to continue due to year-end negotiation (dollar selling) volume inflows and confirmation of weakness in the U.S. economy.

The won-dollar exchange rate reached a yearly high of 1363.5 won in the third quarter amid growing concerns over prolonged tightening, but recently it has shown a rollercoaster pattern and generally entered a downward trend. In particular, right after Jerome Powell, Chairman of the Federal Reserve (Fed), hinted at a rate cut at this month's Federal Open Market Committee (FOMC) meeting, the rate dropped sharply by nearly 25 won. The Korea Financial Investment Center commented, "With expectations of a rate cut, the U.S. stock market is approaching an all-time high, and financial conditions have recently been easing rapidly."

In a recent U.S. economic outlook report, the Korea Financial Investment Center stated, "The U.S. economy is expected to slow down due to cumulative tightening effects restricting consumption and investment, and a reduction in fiscal stimulus effects," emphasizing the possibility of a pivot (direction change) by mid-next year.

Especially, the November U.S. Personal Consumption Expenditures (PCE) price index released on the 22nd (local time) showed a slower increase than market expectations, further strengthening disinflation expectations. It rose 3.2% year-on-year, the lowest level since April 2021. Compared to the previous month, it fell by 0.1%, turning negative for the first time in 3 years and 7 months. This supports predictions that the Fed will lower the benchmark interest rate early next year and leads to additional downward pressure on the dollar.

According to the Seoul foreign exchange market on the 26th, as of 9:30 a.m., the won-dollar exchange rate recorded 1298.9 won, down 4.1 won from the previous trading day's closing price. The rate started at 1299 won, 4 won lower than the previous close, and has been moving within a narrow range near 1300 won. With major financial markets, including the U.S., closed for the Christmas holiday, and no special events to raise market alertness, trading activity remains subdued.

On the 26th, the KOSPI started with a slight rise and maintained a firm upward trend. Employees are working in the dealing room of Hana Bank in Myeongdong, Seoul. Photo by Younghan Heo younghan@

Even if the dollar weakens... Limited won appreciation due to weak fundamentals

Experts predict that in the absence of economic indicators or notable events that could significantly impact the foreign exchange market, the weak dollar trend will continue amid thin year-end trading volumes. Statements from regional Federal Reserve Bank presidents, which had limited downward pressure on the dollar after the FOMC, are also expected to take a break during the year-end holidays, reducing their influence.

Sanghyun Park, a research fellow at Hi Investment & Securities, explained, "Considering the lack of clear events and economic data releases ahead of the year-end, the dollar is expected to fluctuate around the current level. Due to the global capital's increased preference for risk assets, the dollar is likely to maintain a slightly weak trend."

However, despite the high likelihood that the 'King Dollar' era is ending, the market believes that Korea's fragile fundamentals and the weakening yuan contribute to the downward rigidity of the won-dollar exchange rate. The U.S. presidential election and China's slowing growth rate are also variables that reduce the shift toward a weaker dollar.

The LG Economic Research Institute forecasted, "The dollar's strength will ease, and the won-dollar exchange rate will gradually decline, but it will be difficult to enter the 1100 won range as in the past. Since it is hard to expect large current account surpluses like before, the rate will only fall to around 1270 won in the first half and 1210 won in the second half."

Chanhee Kim, a researcher at Shinhan Investment Corp., said, "Improved risk appetite due to expectations of a Fed pivot increases downward pressure on the exchange rate," but added, "For further declines, a broader improvement in manufacturing fundamentals is necessary."

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