Exchange rate falls to around 1230 won... 'Weak dollar' continues ahead of Monetary Policy Committee meeting

As expectations for easing tightening by the U.S. Federal Reserve (Fed) have revived, the won-dollar exchange rate fell below the 1,240 won level during the session. The exchange rate recording in the 1,230 won range is the first in about seven months since early June last year. Ahead of the Bank of Korea's Monetary Policy Committee meeting scheduled for the 13th, the dollar's weakness is expected to ease pressure for interest rate hikes, but given the still significant inflation uncertainty, there is also talk of the exchange rate possibly rebounding again.

On the 10th in the Seoul foreign exchange market, the won-dollar exchange rate started trading at 1,239 won, down 4.5 won from the previous trading day. This is the lowest level since May 31 last year (1,235 won) based on the opening price. Considering it opened at 1,280.5 won on the 4th, it has plunged more than 40 won in less than a week. After entering the 1,240 won range the day before, it fell back to the 1,230 won range in just one day, leading to analysis that the 'strong dollar' trend continuing since mid-last year has reached its final stage.

The won-dollar exchange rate peaked at 1,444.2 won during the session on October 25 last year and has been steadily declining since. The dollar's value has weakened and the won's value has risen because fears of Fed tightening have gradually eased. In particular, the U.S. December employment data released on the 6th (local time) showed a slowdown in wage growth, spreading expectations that the Fed's rationale for raising interest rates has significantly weakened. The U.S. employment trend index slowed for three consecutive months, which was interpreted as a precursor to rising unemployment, further encouraging the dollar's decline.

While expectations are high that the Fed will end its rate hikes in the first quarter of this year, the Chinese yuan is showing an upward trend, creating an atmosphere that leads to a decline in the won-dollar exchange rate. Chinese authorities are focusing on economic recovery after lifting COVID-19 restrictions, and the yuan continues to strengthen accordingly. China is actively continuing measures such as abolishing mandatory quarantine, reopening borders, and providing financial support to real estate developers. This strengthens global investors' preference for risk assets, acting as downward pressure on the dollar and upward pressure on the yuan and won.

With the dollar's strength significantly weakening ahead of the Monetary Policy Committee meeting, the Bank of Korea's room for maneuver in operating monetary policy is expected to widen somewhat. The Monetary Policy Committee will hold a meeting on the 13th to decide whether to raise the base interest rate, and many market forecasts suggest a 0.25 percentage point hike amid persistent inflation rates in the 5% range. Earlier, Bank of Korea Governor Lee Chang-yong stated in his New Year's address, "Since inflation, which is most important to people's lives, is expected to continue rising above the target level, monetary policy will maintain a stance focused on price stability."

However, unlike last year, the won-dollar exchange rate has fallen to the 1,200 won range, and many forecasts suggest a full-scale economic recession this year, so interest rate hikes may not be easy from next month. The market widely believes that since the dollar has weakened, the Bank of Korea's terminal rate could be decided at around 3.5%. According to the Bank of Korea, as of the monetary policy meeting in November last year, among the six Monetary Policy Committee members excluding Governor Lee, three considered 3.50%, and the remaining two considered 3.75% or higher.

However, some opinions suggest it is still premature to judge that the won-dollar exchange rate has fully stabilized. In fact, recent Fed officials continue to warn that inflation remains unstable and U.S. rate hikes will continue. Mary Daly, President of the Federal Reserve Bank of San Francisco, recently said, "The Fed will raise rates above 5%," and Raphael Bostic, President of the Atlanta Fed, also emphasized, "The Fed will maintain rates above 5% for a long time."

The Fed will hold the Federal Open Market Committee (FOMC) meeting from the 31st of this month to the 1st of next month to decide on rate hikes. The market widely expects the Fed to raise rates by 0.25 percentage points this time. The current U.S. base interest rate is around 4.25?4.5%. According to the Chicago Mercantile Exchange (CME) FedWatch, the market expects the Fed to raise rates by 0.25 percentage points again at the March FOMC following February, pushing rates to 4.75?5%. In this case, the interest rate gap between Korea and the U.S. could widen to a maximum of 1.5 percentage points.

Short-term forecasts for the won-dollar exchange rate diverge between a drop to 1,210 won and a continuation above 1,230 won. Min Kyung-won, a researcher at Woori Bank, said, "Considering downward position bias, the next support level is open up to 1,210 won," adding, "The scenario of falling below 1,200 won is not highly probable in the short term." Kim Seung-hyuk, a researcher at NH Futures, explained, "The won-dollar exchange rate will continue its downward trend as the China-driven reopening expectations lead to yuan strength and the weakening Fed tightening concerns sustain a weak dollar trend. However, importers' payment demand and bargain buying are expected to defend the exchange rate around the mid-to-high 1,230 won range."