[2023 Economic Outlook] Fading 'King Dollar'... Next Year's Exchange Rate Below 1300 Won

Decline in KRW-USD Exchange Rate Amid US Interest Rate Hike Slowdown
Stability Around 1300 KRW Expected in Early Next Year
Possibility of 1200 KRW Range in Second Half if Rate Hikes Pause
However, Dollar Preference May Strengthen Again Due to Recession

The era of the "King Dollar" is coming to an end as the U.S. Federal Reserve (Fed) slows down the pace of interest rate hikes. The won-dollar exchange rate, which once exceeded 1,440 won and burdened domestic inflation, exports, and financial markets, has recently fallen to around 1,300 won, with volatility gradually decreasing. Experts predict that until the first half of next year, when the Fed's rate hikes continue, the exchange rate will show some instability around the mid-1,300 won range, but it is likely to settle below 1,300 won from the second half onward.

On the 5th, the won-dollar exchange rate closed at 1,292.6 won, down 7.3 won from the previous trading day's closing price in the Seoul foreign exchange market. It has recently remained relatively stable below the 1,300 won mark. After reaching a yearly high of 1,444.2 won on October 25, it began to plunge sharply from early last month and has recently fluctuated between the high 1,200 won and low 1,300 won ranges depending on domestic and international market conditions. Dollar weakness became evident after Fed Chair Jerome Powell said in a speech at the Brookings Institution think tank on the 30th of last month (local time) that "it is reasonable to slow down rate hikes."

Experts foresee that the won-dollar exchange rate will unlikely experience a sharp rise above 1,400 won next year as it did this year. Hwang Se-woon, Senior Research Fellow at the Korea Capital Market Institute, said, "The peak of the benchmark interest rates in the U.S. and South Korea is expected in the first quarter of next year, but typically, the exchange rate peak appears before that." He added, "Until the first quarter, it will move between 1,250 and 1,350 won, and if the U.S. benchmark rate stops at 5%, the exchange rate will stabilize in the 1,200 won range." This assumes that the Fed will implement a 'big step' (a 0.50 percentage point rate hike) in December this year and raise it by another 0.50 percentage point in February or March next year, reaching a benchmark rate of 4.75?5%, indicating that the exchange rate peak has already passed.

The gradual easing of China's COVID-19 prevention measures is also a factor contributing to dollar weakness. The Chinese yuan had been sharply declining due to the authorities' strict 'zero-COVID' lockdown policies, and the won, which tends to follow the yuan, also weakened. However, as protests against zero-COVID policies have spread in several cities including Beijing and Shanghai recently, the authorities have begun to lift many of the restrictions. If China fully reopens around February after the Lunar New Year next year, risk appetite is expected to increase, likely continuing the dollar's weakness as a safe-haven asset.

However, some argue that it is still too early to declare the end of the "King Dollar" era. With steep interest rate hikes in the U.S. and other major countries, the global economy is expected to enter a recession next year, which could increase dollar demand due to reduced risk appetite. The Bank of Korea stated in its revised economic outlook on the 24th of last month that "the global economy is expected to weaken significantly" and "global trade growth will slow, especially in goods trade." The International Monetary Fund (IMF) projects global economic growth next year at 2.7%, lower than 6.0% in 2021 and 3.2% in 2022, while the Organization for Economic Cooperation and Development (OECD) and global investment banks (IBs) have also factored in a slowdown with forecasts around 2.1?2%.

Cho Kyung-yeop, Head of Economic Research at the Korea Economic Research Institute, said, "Since confidence in the Japanese economy is weaker than in the past, the yen is likely to continue weakening, and Europe, including Germany and the UK, is in such poor condition that even talks of negative growth are emerging, so the dollar's strength will be maintained to some extent next year." He added, "However, it will not be as rapid an increase as this year, and the exchange rate is expected to fluctuate in the low to mid-1,300 won range."

The KOSPI opened at 2,471.50, down 8.34 points (0.34%) from the previous trading day on the 2nd. The photo shows the dealing room of Hana Bank in Jung-gu, Seoul. On the same day, the won-dollar exchange rate started at 1,303.5 won, up 3.8 won from the previous trading day. Photo by Kim Hyun-min kimhyun81@