[King Dollar's Bombardment] Unstoppable Exchange Rate, Will It Surpass 1400 Won?

[Asia Economy Reporter Seo So-jung] The won-dollar exchange rate is soaring to unprecedented heights. It has set new highs for five consecutive trading days recently, surpassing 1,370 won for the first time in 13 years and 5 months. With Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), expected to reiterate the necessity of steep interest rate hikes to control high inflation at the monetary policy conference on the 8th, and with no clear factors to change the trend in the foreign exchange market, concerns are rising that the exchange rate could reach the 1,400 won level within this month.

According to the Seoul foreign exchange market on the 7th, the won-dollar exchange rate closed at 1,371.7 won the previous day, marking the highest level since April 1, 2009 (1,379.5 won), 13 years and 5 months ago. During the session, it surged to 1,377.0 won, coming close to the 1,400 won mark. The recent rise in the exchange rate is driven not only by the global dollar strength but also by the weakness of the yuan and euro, accompanied by supply-demand imbalances. The widening trade deficit in Korea for August has also fueled the exchange rate increase. Kim Jeong-sik, Professor Emeritus of Economics at Yonsei University, said, "The direction of the won-dollar exchange rate is linked to the trade balance; if the trade balance improves, the exchange rate can decline, but if the trade deficit widens, it is difficult for the exchange rate to fall." He added, "Unless there is a change in U.S. monetary policy, the strong dollar phenomenon is expected to continue for the time being."

In the foreign exchange market, as the strong dollar trend is expected to continue this month, the prevailing view is that the exchange rate will soon exceed 1,400 won. Moon Hong-chul, a researcher at DB Financial Investment, said, "Not only the Fed's interest rate hikes but also the rapid liquidity reduction in September could push the exchange rate beyond 1,400 won," adding, "The weakness of the yuan is also a factor putting upward pressure on the exchange rate." Jeon Gyu-yeon, a researcher at Hana Securities, also stated, "Until the Federal Open Market Committee (FOMC) meeting this month, the foreign exchange market will watch the Fed's tightening stance and maintain the strong dollar trend, and the sluggish European economy is also expected to induce dollar strength." He assessed, "Since there is no significant resistance level at the current exchange rate, it is necessary to keep the upper limit of the exchange rate open up to 1,400 won."

The variables are the upcoming European Central Bank (ECB) monetary policy meeting on the 8th and the U.S. August Consumer Price Index (CPI). If the ECB unexpectedly raises interest rates by 0.75 percentage points at the monetary policy meeting, the ongoing euro weakness combined with the strong dollar could pause. In this case, the euro weakness risk, which has recently pulled down the won's value, could be somewhat alleviated. If the CPI, to be announced on the 13th, is confirmed to be lower than expected, the pressure for dollar strength could ease.