[Why&Next] Won-Dollar Exchange Rate Hits Highest Point in Two and a Half Months... How High Will It Go?

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The won-dollar exchange rate has been rising sharply since the beginning of the year. It is analyzed that a combination of factors, including geopolitical risks centered in the Middle East, a decrease in expectations for an early interest rate cut by the United States, and a continued decline in the KOSPI, have led to the strengthening of the dollar.

On the 17th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,338.0 won, up 6.2 won from the previous trading day. The rise continued, and as of 10:30 a.m., it surpassed 1,340 won. This is the first time in two months and fifteen days since November 2 of last year that the won-dollar exchange rate has exceeded 1,340 won.

Several factors have contributed to the sharp rise in the won-dollar exchange rate since the beginning of the year. First, it is analyzed that the geopolitical risks emerging in the Middle East are causing the dollar to strengthen.

Following the U.S. airstrike on Yemen's Houthi rebels, the Iranian Revolutionary Guard Corps destroyed Israeli intelligence facilities, escalating geopolitical risks in the Middle East. The Houthi rebels, supported by Iran, have attacked civilian ships passing through the Red Sea, a major international trade route, under the pretext of supporting Palestine after the outbreak of war between Israel and the Palestinian armed group Hamas. In response, the U.S. and the U.K. have recently launched large-scale bombings on dozens of Houthi facilities using fighter jets, ships, and submarines, citing direct action against threats to global trade routes.

Concerns that the Middle East conflict could escalate have pushed the dollar index, which measures the value of the dollar against six major currencies, to 102.63, the highest level in about a month.

The reduced expectations for an early interest rate cut by the U.S. have also driven the strength of the dollar as a safe-haven asset. The U.S. Federal Reserve (Fed) officially signaled an interest rate cut this year at last month's Federal Open Market Committee (FOMC) meeting, which had previously led to a weaker dollar.

However, with consumer prices in December exceeding market expectations and growing concerns that a rapid rate cut could reignite inflation, calls for a more cautious approach have gained traction.

Fed Governor Christopher Waller, in a speech at the Brookings Institution in Washington D.C. on the 16th, acknowledged the need for a rate cut within the year but emphasized that policy changes should be made cautiously and not rushed. Waller stated, "It is true that recent economic indicators have made a rate cut within the year possible, but concerns remain about whether the recent trend can continue, which requires that changes in the Fed's monetary policy path be carefully managed and not hastily implemented."

Jin Ok-hee, a researcher at Hana Financial Management Research Institute, evaluated, "The dollar has strengthened as the December FOMC minutes lacked specific discussions on the timing of rate cuts, which was interpreted as hawkish (favoring monetary tightening), weakening expectations for an early Fed rate cut. Coupled with emerging geopolitical risks, downward pressure continues."

The continued weakness of the domestic stock market also fuels the depreciation of the won. Since the beginning of the year, the KOSPI has consistently declined by more than 5%, marking the largest drop in 16 years since 2008. The KOSPI decline is due to simultaneous selling by foreign and institutional investors. In particular, the steady selling of Korean stocks by foreigners is also seen as contributing to the won's weakness.

Park Sang-hyun, a researcher at Hi Investment & Securities, explained, "Various domestic and international geopolitical risks and the KOSPI index's eight consecutive trading days of decline are limiting the won's strength. Additionally, dollar selling related to the Samsung Group block deal earlier this week has temporarily affected supply and demand, so a rebound in domestic stock prices is necessary for the exchange rate to fall again."

As domestic and international risks increase, there are also forecasts that the dollar's strength will continue throughout the first quarter.

Researcher Jin said, "As the perception that U.S. early rate cut expectations were excessive leads to dollar strength, combined with pressures on Asian currencies to weaken, the won's depreciation trend is expected to continue for the time being."

Researcher Park said, "For the exchange rate to turn downward, the U.S. interest rate cut needs to come into sight, which is expected around the end of the first quarter or early second quarter."

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