[Why&Next] 1200 Won? 1400 Won? ... Exchange Rate Fluctuations Ahead of the Financial Monetary Policy Committee Meeting

Exchange Rate Fell to 1308.5 Won Then Rose to 1340 Won Range
Fluctuations Increase Amid US Interest Rate Hike Outlook
Experts Expect Rate to Hover Around 1300 Won for Now
1400 Won Breakthrough Possible... 1200 Won Range Not Until Year After Next
With Slight Exchange Rate Drop, Monetary Policy Committee Likely to Raise by 0.25%p

Dealers are working in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul.
[Photo by Yonhap News]

The won-dollar exchange rate, which seemed to have somewhat stabilized, has recently shown an upward trend again, displaying signs of instability. Earlier this month, when it dropped sharply by more than 100 won, there were forecasts that the exchange rate could fall to the 1,200 won range. However, as officials from the U.S. Federal Reserve (Fed) have consecutively expressed strong tightening intentions, the possibility of surpassing 1,400 won again is being discussed. Experts see a low likelihood of breaking the previous high in the mid-1,400 won range but expect significant fluctuations around 1,300 won for the time being.

According to Seoul Foreign Exchange Brokerage on the 21st, the won-dollar exchange rate fell from 1,429.6 won on the 1st of this month to 1,308.5 won on the 14th, then recently surged past the 1,340 won level, showing considerable volatility. After hitting a yearly high of 1,444.2 won on the 25th of last month and continuing its high-level rally, it dropped by more than 100 won within a week and then rose nearly 40 won in just two days, clearly showing a 'rollercoaster market.' Gong Dong-rak, a researcher at Daishin Securities, said, "It is no longer possible to predict U.S. monetary policy with the regularity seen in the past," adding, "The exchange rate is often likened to a rugby ball, and this year it is even more so."

The won is heavily influenced by external political and economic conditions such as those in the U.S. and China. Given the recent significant expansion of uncertainties like economic slowdown, interest rate hikes, and geopolitical instability, the volatility is inevitably increasing. While the U.S. Consumer Price Index (CPI) inflation rate dropping to the 7% range raises expectations that inflation has peaked, which tends to lower the won-dollar exchange rate, Fed officials' warnings of further rate hikes and the prolonged Ukraine-Russia war act as factors pushing the exchange rate upward.

Employees organizing US dollars at the Counterfeit Response Center of Hana Bank Headquarters in Euljiro, Jung-gu, Seoul
[Image source=Yonhap News]

The won-dollar exchange rate plays a crucial role not only in South Korea's imports and exports and current account balance but also in the direction of monetary policy, drawing significant market attention regarding its future trajectory. Earlier, on the 11th, Lee Chang-yong, Governor of the Bank of Korea, told reporters that the sharp drop in the exchange rate due to expectations of easing U.S. tightening was a "good sign" and that "a change has been detected." Consequently, the market analyzed that the Bank of Korea would begin to slow the pace of interest rate hikes starting from the Monetary Policy Committee meeting on the 24th, citing exchange rate decline and financial stability as reasons. However, if the exchange rate surges again, it could negatively impact import prices, trade balance, and foreign exchange reserves, increasing pressure for further rate hikes.

Experts believe that since U.S. interest rate hikes are expected to continue for some time, the likelihood of the exchange rate falling below 1,300 won is low, but they also see it as difficult for the rate to surge well beyond 1,400 won again. Hwang Se-woon, a senior researcher at the Korea Capital Market Institute, said, "Since the U.S. benchmark interest rate peak is expected around the first quarter of next year, the exchange rate will likely peak before then," adding, "On average, it will stay in the 1,300 won range until next year and may drop to the 1,200 won range around the year after next."

Researcher Gong said, "Basically, the strong dollar environment is still valid, so the recent sharp decline in the exchange rate is seen as a reaction to the short-term excessive rise," adding, "I expect the exchange rate to move around the 1,300 won level until the first quarter of next year." He further explained, "Since the Monetary Policy Committee raised rates by 0.50 percentage points in October citing the exchange rate as a reason, I expect a 0.25 percentage point increase this month as the exchange rate has somewhat stabilized."