Polish Missile and US Austerity Concerns... Volatile Exchange Rates

Won-Dollar Exchange Rate Rises Again to Late 1330 Won Range
Geopolitical Concerns in Ukraine and US Tightening Expectations Impact
Dollar Weakness Pauses as US Tightening Expectations Weaken
Exchange Rate Volatility Widens Ahead of Next Week's Monetary Policy Meeting

On the morning of the 17th, dealers are working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. On this day, the won/dollar exchange rate opened at 1,336.0 won, up 11.0 won, and the KOSDAQ index opened at 740.62, down 2.48 points (0.33%). [Photo by Yonhap News]

The exchange rate between the Korean won and the US dollar rose close to 1,340 won again amid a dispute between Ukraine and Russia over the party responsible for launching the missile that landed in Poland, a member country of the North Atlantic Treaty Organization (NATO). Ahead of next week's Monetary Policy Committee meeting, the won-dollar exchange rate has shown increased volatility, fluctuating more than 20 won in a single day due to expanding geopolitical uncertainties and ongoing concerns about US interest rate hikes.

On the 17th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,336 won, up 11 won from the previous trading day. The foreign exchange market, which opened an hour later than usual at 10 a.m. due to the College Scholastic Ability Test (CSAT), showed an upward trend in the early session, recording the high 1,330 won range. After opening at 1,316.0 won the previous day, the rate rose to around 1,332 won during the session, closed at 1,325 won, and then surged past 1,330 won again, showing significant fluctuations.

The divergent safe-haven sentiment amid geopolitical risks originating from Eastern Europe is interpreted as a factor increasing exchange rate volatility. The exchange rate rose following news that a missile presumed to have been launched by Russia fell in Poland, but it somewhat eased after a US investigation concluded that the missile was launched by Ukrainian forces. However, volatility increased again after Ukrainian President Volodymyr Zelensky strongly denied this overnight.

Volodymyr Zelensky, President of Ukraine, is delivering a speech via video conference during a session of the G20 Summit held on the 16th (local time) in Nusa Dua, Bali, Indonesia. [Image source=Yonhap News]

Ukraine is strongly demanding access to the incident site and a joint investigation. Although NATO and the US have tentatively concluded that the missile was for Ukraine's interception, lowering the possibility of a 'Third World War' between the West and Russia, military tensions remain high as Russia recently launched over 100 missiles across Ukraine, keeping the financial markets on edge.

Robust US consumer spending is also contributing to the rise in the won-dollar exchange rate. The US Department of Commerce announced that October retail sales increased by 1.3% year-on-year, surpassing market expectations of 1.0% and marking the highest level in eight months. Market analysts suggest that such economic indicators could provide ongoing justification for the US Federal Reserve (Fed) to continue raising interest rates.

Although the US Consumer Price Index (CPI) inflation rate has fallen to the 7% range, raising hopes for a possible easing of the Fed's tightening policy, recent remarks from Fed officials have dampened market expectations. John Williams, President of the New York Fed, emphasized that "financial risks should not influence interest rate decisions" and stressed the need to maintain high interest rates. Kim Seung-hyuk, a researcher at NH Futures, said, "Fed officials have drawn a line, saying it is not yet time to discuss halting rate hikes, which has somewhat diluted pivot expectations," adding, "Given the ongoing confusion about the timing of stopping rate hikes, it is difficult for the exchange rate to break below 1,300 won."

On the 2nd (local time), Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), is holding a press conference in Washington DC, USA. [Image source=Yonhap News]