An employee is organizing dollars at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. [Photo by Yonhap News]
As the US dollar continues to weaken, there are forecasts that the won-dollar exchange rate could fall below 1200 won this year. Although uncertainty remains high regarding our export outlook, the won is expected to continue strengthening as the Japanese yen and Chinese yuan show strength, and the US Federal Reserve (Fed) is likely to slow the pace of interest rate hikes.
In the Seoul foreign exchange market on the 20th, the won-dollar exchange rate opened at 1236 won, then immediately turned downward, fluctuating in the low to mid-1230 won range before closing at 1235.5 won. The exchange rate, which had fallen to as low as 1230.2 won during the previous day’s session, rose again due to inflows of dollar buying, but the increase was limited as export companies sold dollars ahead of the Lunar New Year holiday.
Recently, the won-dollar exchange rate has been under increasing downward pressure amid a global dollar weakness and strength in Asian currencies. The dollar index, which shows the value of the dollar against six major currencies, recently dropped to the 101 level during trading, marking its lowest point since May last year. This reflects growing expectations that the Fed will slow the pace of rate hikes as US consumer spending weakens. According to the US Department of Commerce, retail sales in December last year fell 1.1% month-on-month, a larger decline than the Bloomberg consensus forecast of -0.9%. ING analyzed this by stating, "Weak retail sales suggest that a recession may already be underway."
Many in the market expect the Fed to raise the benchmark interest rate by only 0.25 percentage points next month. After ending four consecutive 'giant steps' (0.75 percentage point hikes) in December last year and shifting to 'big steps' (0.5 percentage point hikes), it is now anticipated that the Fed will further reduce the hike to 0.25 percentage points. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a 0.25 percentage point rate hike next month stands at 97.2%.
Additionally, the recent spread of risk asset preference has led investors to turn their attention from the dollar to emerging markets such as the yuan, further fueling dollar weakness. The yuan’s value against the dollar ranks among the top gainers among global currencies this year. Guan Tao, Chief Economist at Zhongyin Securities, explained, "Market confidence has been restored due to expectations of a rebound in the Chinese economy alongside reopening (resumption of economic activities)." Furthermore, the yen has also shown continuous strength recently amid growing expectations of a shift in the Bank of Japan’s monetary policy stance.
The market also expects the won to continue strengthening. Although Korea’s trade balance deterioration could weaken the won, the prospect of trade balance improvement due to China’s economic recovery is a factor driving won strength. Jeong Yong-taek, Senior Research Fellow at IBK Investment & Securities, said, "Considering Korea’s credit risk, the exchange rate remains at a high level. While there is strong psychological resistance among market participants to the 1200 won level at this time, it is highly likely that the won-dollar exchange rate will fall below 1200 won per dollar within this year."
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