Market Cheers Possible US Interest Rate Cut in June... Sharp Drop in Exchange Rate (Update)

Possibility of Three US Interest Rate Cuts Within the Year Increases
Expectations for Strengthening of Won and Yen

On the 21st, the KOSPI opened at 2,731.18, up 41.04 points (1.53%) from the previous trading day (2,690.14), as employees were working in the dealing room of Hana Bank in Jung-gu, Seoul. On the same day, the KOSDAQ index rose 9.01 points (1.01%) from the previous trading day (891.45) to 900.46, and the won-dollar exchange rate started at 1,329.5 won, down 10.3 won from the previous trading day (1,339.8 won). Photo by Jo Yongjun jun21@

As the possibility of a U.S. interest rate cut increases, the stock market is rising and the won-dollar exchange rate is showing a significant downward trend.

As of 10:14 a.m. on the 21st, the won-dollar exchange rate in the Seoul foreign exchange market is trading at 1,326.66 won, down 13.2 won from the previous trading day. The won-dollar exchange rate opened at 1,329.5 won, down 10.3 won from the previous trading day, and has been widening its decline since then.

The U.S. Federal Reserve (Fed) held a Federal Open Market Committee (FOMC) meeting on the 20th (local time) and announced that it would keep the benchmark interest rate steady at 5.25-5.5%.

The Fed expects the year-end benchmark interest rate to be 4.6% (median), maintaining the forecast presented in December last year. Similar to the FOMC announcement at the end of last year, this is interpreted as planning to cut interest rates three times by 0.25 percentage points each, totaling about 0.75 percentage points within this year.

The market had been watching whether the Fed would maintain its policy of three rate cuts this year or change it to two cuts, and it indicated three cuts. Initially, the market judged that due to stronger-than-expected inflation at the beginning of the year, the Fed might lower its rate cut forecast from three times to two times in the dot plot. However, with the increased possibility of three cuts, the stock market is rising and the dollar is weakening.

According to Bloomberg, the probability of a policy rate cut in June reflected in the federal funds futures rose from 57% to 69%, and the year-end policy rate forecast fell from 4.60% (2.9 cuts) the previous day to 4.49% (3.3 cuts).

It is expected that the dollar will remain weak for the time being, while the won and yen will strengthen.

Min Kyung-won, an economist at Woori Bank, said, "The New York stock market continued to hit record highs as expectations for a June rate cut rose again after the FOMC and Powell's press conference, and both treasury yields and the dollar closed lower," adding, "The risk appetite triggered by the dovish interpretation of the FOMC will create a favorable atmosphere for won strength."

Kim Ho-jung, a researcher at Yuanta Securities, said, "The biggest concern in the market was whether the number of rate cuts this year would be reduced from three to two, but with that concern gone, it had a positive effect on the market," adding, "The FOMC risk has disappeared for the time being, and with the overall macro environment improving, the won-dollar exchange rate can gradually decline."

Kim added, "The possibility of a U.S. interest rate cut combined with the Bank of Japan's interest rate hike could strengthen the yen," but added, "However, unlike Korea, Japan's exports have not yet recovered, so it should be viewed from a somewhat conservative perspective."

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