As forecasts diverge on the timing of the end of the U.S. tightening cycle, exchange rates are fluctuating again. The won-dollar exchange rate fell to the 1,210 won level on the 2nd but surged to the 1,240 won level on the 6th, showing a sharp rise, while the yen-dollar rate also soared to the 132 yen level, marking the highest in three weeks. Given the significant gap between market expectations and the Fed's perception regarding the direction of U.S. Federal Reserve (Fed) monetary policy, the foreign exchange market is expected to experience large fluctuations for the time being.
On that day, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,247.5 won, up 18.1 won from the previous trading day. Since then, it has been fluctuating in the mid-1,240 won range. The exchange rate plunged more than 10 won in a single day on the 2nd, falling to an intraday low of 1,216.4 won, the lowest in 10 months, but then rose back close to 1,250 won within two trading days, showing a large fluctuation of around 30 won.
The renewed upward trend in the exchange rate is supported by analysis that the end of the Fed's tightening cycle could be delayed further as U.S. employment data came out better than market expectations. According to the U.S. Department of Labor's announcement last weekend, the number of new nonfarm payrolls in January was 517,000, nearly three times the expert forecast of 187,000 compiled by Dow Jones. The unemployment rate also fell to 3.4%, the lowest in 54 years.
Accordingly, the dollar index, which measures the value of the dollar against the currencies of six major countries, rose to 103.13 on the 5th (local time), showing strength. The dollar index reaching the 103 level is the first time in about a month since the 11th of last month. As the dollar turned strong, the yen-dollar exchange rate soared to 132.48 yen, the highest level since the 12th of last month. The yen had shown a record low last year due to the Bank of Japan's continuous monetary easing policy but has continued to rise this year, though it remains highly volatile depending on the dollar's movement.
The foreign exchange market is likely to continue this trend for the time being. It is difficult to make premature judgments about the Fed's monetary policy direction at this point, and the perception gap with the market remains large. Despite the Fed's 0.25 percentage point rate hike last week, the market has raised the possibility of a rate cut within the year due to easing inflation and economic recession concerns.
The market expects dollar weakness as U.S. rate hikes near their end, but if the tightening continues longer than expected, it could have a significant impact on domestic and international financial and foreign exchange markets. Lee Seung-heon, Deputy Governor of the Bank of Korea, pointed out at a market situation review meeting on the 2nd, "There is a large perception gap between the Fed and the market regarding inflation and policy paths," adding, "We cannot rule out the possibility of increased volatility in global financial markets during the expectation adjustment process."
Fed Chair Jerome Powell also maintains a somewhat dual stance, stating there will be no rate cuts within the year while mentioning that inflation has somewhat eased, which could only increase market confusion. Experts believe it will be difficult for the won-dollar exchange rate to fall to the 1,100 won level anytime soon. There is also analysis that the Japanese government will nominate Masayoshi Amamiya, Deputy Governor of the Bank of Japan who designed the ultra-loose monetary policy, as the next governor of the Bank of Japan, which is expected to fuel yen weakness and dollar strength.
Kim Seung-hyuk, a researcher at NH Futures, explained, "The market is likely to raise fundamental doubts about the Fed's rate cycle, which was expected to end after 2-3 hikes," adding, "This could act as downward pressure on the won due to risk aversion sentiment."
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