Won-Dollar Exchange Rate Surpasses 1200 Won, This Quarter Marks This Year's Peak

[Asia Economy Reporter Song Hwajeong] The won-dollar exchange rate has surpassed 1,200 won for the first time in about 17 months, and it is expected to pass its peak during this quarter.

In the Seoul foreign exchange market yesterday, the won-dollar exchange rate closed at 1,201.5 won, up 0.5 won, exceeding 1,200 won for two consecutive days. The won-dollar exchange rate closed at 1,201.0 won on the 6th, surpassing 1,200 won for the first time in about 1 year and 5 months since July 24, 2020, based on the closing price. Lim Hyeyoon, a researcher at Hanwha Investment & Securities, analyzed, "With factors favoring the rise of the won-dollar exchange rate (weakening of the won) such as the full-scale normalization of the U.S. Federal Reserve (Fed) monetary policy, the relative strength of the U.S. economy, and the trade deficit, the range of exchange rate increase expanded as it was confirmed that a faster-than-expected balance sheet reduction was discussed at the December Federal Open Market Committee (FOMC)."

For the time being, the won-dollar exchange rate is expected to fluctuate around 1,200 won. Researcher Lim said, "Considering that uncertainty factors still exist, the won-dollar exchange rate will remain at a higher level than before."

The U.S. consumer price index announcement on the 12th and the FOMC scheduled for the 26th-27th are all key variables affecting the Fed's policy path, so the won-dollar exchange rate in January is expected to move around 1,200 won amid increasing uncertainty. Seasonally, the relatively small trade surplus in January is also expected to limit the decline of the won-dollar exchange rate. Researcher Lim explained, "If additional overshooting occurs, the upper limit should be left open to around 1,230 won (the level seen in May 2020 when concerns heightened again after the COVID-19 pandemic), but the possibility is low because, unlike the unpredictable COVID-19, monetary policy uncertainty will gradually ease."

The won-dollar exchange rate is expected to pass its peak this quarter. Researcher Lim said, "In the past, after the Fed's base rate hikes and balance sheet reductions were realized, the won-dollar exchange rate declined," adding, "This time as well, as uncertainty related to Fed policy eases and major economies outside the U.S. rebound, the won-dollar exchange rate will also decline moderately." He further added, "After this quarter, the won-dollar exchange rate will fluctuate around the mid-1,100 won level amid a continued dollar strength trend."