Won-Dollar Exchange Rate Volatility Increases Amid Uncertainty Over Interest Rate Cuts

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Volatility in the foreign exchange market is increasing again as expectations for an early interest rate cut in the United States diminish. With the theory of a March rate cut by the U.S. Federal Reserve somewhat retreating, there is a forecast that the dollar may maintain a strong trend for the time being.

On the 5th, the won-dollar exchange rate opened at 1,313.0 won, up 3.0 won from the previous trading day in the Seoul foreign exchange market. The won-dollar exchange rate has been rising for four consecutive trading days since the beginning of the year.

Due to the U.S.'s high interest rate policy, the won-dollar exchange rate, which showed strength last year, turned weak toward the end of the year after Jerome Powell, Chairman of the Fed (Federal Reserve), suggested last month that "the benchmark interest rate has reached or is near its peak," implying a rate cut.

The won-dollar exchange rate, which rose to 1,363.5 won in October last year, closed down to 1,288.0 won on the last trading day of December 28.

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However, this year, as the possibility that the U.S. benchmark interest rate cut may not be as fast as expected has come to the forefront, the rate has risen back to the 1,300 won level.

According to the minutes of the December FOMC (Federal Open Market Committee) meeting released by the Fed on the 3rd, the members did not have specific discussions about when to lower interest rates this year.

Some members indicated that due to increased uncertainty, there might even be a situation where the benchmark interest rate needs to be raised. This is seen as a different tone from Powell's earlier remarks about rate cuts.

Following the release of the minutes, the U.S. employment data also came out strong, causing the market's theory of a March rate cut to retreat. According to the ADP (Automatic Data Processing) employment report released that day, U.S. private sector employment in December increased by 164,000 compared to the previous month, exceeding the market expectation of 130,000. When employment indicators are stronger than expected, the factors for the Fed to cut benchmark interest rates are diluted.

After the employment-related indicators, government bond yields also showed an upward trend. The 10-year U.S. Treasury yield rose about 8 basis points (1bp = 0.01 percentage points) to 4.00%, and the 2-year yield rose about 6 basis points to 4.40% compared to the previous day. In the interest rate futures market, the probability of the Fed cutting rates in March fell from the 80% range last week to about 66% on that day.

While the market expected an overall decline in the won-dollar exchange rate this year due to expectations of a U.S. benchmark interest rate cut, it is currently evaluated as a phase of reversing somewhat premature expectations.

Park Sang-hyun, a researcher at Hi Investment & Securities, explained, "The global capital's risk asset phenomenon based on expectations of an early Fed rate cut acted as a pressure for dollar weakness, but stronger-than-expected U.S. economic indicators are factors limiting further dollar weakness."

Oh Hyun-hee, a research fellow at Hana Financial Management Research Institute, forecasted, "This year, the won-dollar exchange rate is expected to fluctuate between 1,230 won and 1,330 won due to export recovery and an expansion of the current account surplus. However, uncertainties such as the timing of the U.S. rate cut and the possibility of delayed economic recovery in China remain as risk factors."

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