[Why&Next] Strengthened Won Flying Solo... Differentiation Among Han, Jung, and Il

Won at 800 Won Range · Won-Dollar at 1200 Won Range
Expectations for End of US Interest Rate Hikes
Won Strengthening Expected to Continue for a While
Departure from Korea-China-Japan Currency Synchronization

Recently, as the won-dollar exchange rate has been trending downward, attempting to stabilize in the 1,200 won range, the won-yen exchange rate has also entered the 800 won range for the first time in eight years, showing a notably strong won. The Chinese yuan has also weakened due to weaker-than-expected economic indicators, leading to a differentiation among the previously synchronized Korean, Chinese, and Japanese currencies, forming a new dynamic relationship.

Experts expect that despite monetary tightening in the U.S. and Europe, Japan will continue its solo easing policy, causing the yen's value to temporarily decline. The won-dollar exchange rate is projected to fluctuate in the mid-1,200 won range this month due to expectations of the end of the U.S. interest rate hike cycle and continued dollar weakness, then fall to the low 1,200 won range in the second half of the year.

According to the Seoul foreign exchange market on the 20th, as of 9:18 a.m., the won-dollar exchange rate was trading at 1,283.6 won, up 1.6 won from the previous day. At the same time, the won-yen recalculated exchange rate was 904.22 won per 100 yen, down 0.99 won from the previous day's 3:30 p.m. reference rate of 905.21 won. The won-yen recalculated exchange rate has been fluctuating in the low to mid-900 won range after touching the lowest level in eight years in the 800 won range the previous morning. The won-yen exchange rate entering the 800 won range is the first occurrence since June 2015.

Japan's Unprecedented Yen Weakness Amid Continued Money Printing

The recent pronounced decline in the yen's value is largely due to Japan's monetary policy of persistently continuing money printing alone. The Bank of Japan (BOJ) held a monetary policy meeting on the 16th and kept the short-term interest rate at minus (-0.1%) and maintained the 10-year government bond yield, a long-term rate indicator, at around 0%. The BOJ intends to continue its accommodative monetary policy until inflation is promoted and the consumer price index (excluding fresh food) stabilizes at 2%. This contrasts with major countries like the U.S. and Europe, which continue tightening monetary policies through interest rate hikes to curb inflation. Meanwhile, the won has shown strength compared to other currencies, contributing to the decline in the won-yen exchange rate. Park Sang-hyun, a researcher at Hi Investment & Securities, said, "The BOJ's monetary policy is a variable to watch regarding future exchange rates," adding, "Even if the BOJ maintains accommodative monetary policy for the time being, if it shifts policy toward the end of the year, the yen could strengthen, which could also act as a factor strengthening the won."

The won-dollar exchange rate has also recently shown a downward stabilization trend. The won-dollar rate, which was 1,321.6 won in early June, fell to 1,282.0 won (closing price) the previous day. On this day, the exchange rate opened at 1,283.0 won, up 1.0 won from the previous day, amid caution ahead of Fed Chair Jerome Powell's testimony before the U.S. Congress on the 21st (local time), but it has maintained the 1,200 won range for eight consecutive trading days.

The downward trend in the won-dollar exchange rate is gaining weight due to expectations that U.S. interest rate hikes will end in the second half of the year, leading to a medium- to long-term weakening of the dollar. The Fed paused its ten consecutive rate hikes since March last year at last week's Federal Open Market Committee (FOMC) meeting, keeping the benchmark rate steady in a 'breather.' At the same time, it raised the median estimate for the year-end rate to 5.6%, suggesting two more rate hikes this year, but the market remains skeptical of the Fed's rate outlook.

Experts forecast that despite uncertainties in U.S. monetary policy, yuan weakness, and trade deficit remaining as variables, the medium- to long-term trend will continue downward for the won-dollar exchange rate. Researcher Park said, "As uncertainty over U.S. rate hikes is resolved, the exchange rate will show a gradual downward trend," adding, "There will be temporary fluctuations, but the exchange rate could fall to the 1,230 won range in the second half." Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "Market expectations are growing that the Fed will implement its last rate hike at the upcoming FOMC and end monetary tightening," forecasting, "This month, the exchange rate will move in the mid-1,200 won range and fall to the low 1,200 won range in the second half." The continued net buying by foreigners in the domestic stock market also contributes to the exchange rate decline. Oh said, "As foreign investment inflows continue in the domestic stock market, supply and demand conditions improve, which is a factor strengthening the won," adding, "Risk asset preference is reviving, and demand for the won, classified as a risk currency, continues."

U.S. Rate Hikes, Korean Export Recovery, and Japanese Monetary Policy as Variables

Although domestic export sluggishness and trade deficit trends continue, the expectation that exports will improve in the second half of the year also supports the exchange rate decline. Since the trade deficit peaked in January, the decline in exports has narrowed, and if export prices recover through the full-scale production cuts of key export items like semiconductors in the second half, it could lead to a lower exchange rate.

However, factors such as the pace of U.S. inflation slowdown and China's economic recovery will be key determinants of the won-dollar exchange rate direction. Park said, "One more U.S. rate hike may not have a significant impact, but if U.S. inflation is not controlled and monetary tightening intensifies, it will pose a risk," adding, "If concerns about the latent U.S. commercial real estate market materialize, dollar strength could appear." Although the won-yuan decoupling phenomenon has recently emerged, if the pace of domestic export recovery due to China's economic improvement is slower than expected, it could negatively affect the exchange rate. Global investment banks such as Goldman Sachs have repeatedly lowered their economic growth forecasts, increasing concerns about the Chinese economy and causing the yuan to weaken.

Meanwhile, amid the decline in the won-yen exchange rate, controversy continues as the Deputy Prime Minister mentioned the possibility of a Korea-Japan currency swap agreement. At a press conference on the previous day reviewing the inflation stabilization target operation, Bank of Korea Governor Lee Chang-yong responded to a question about whether a currency swap is necessary when the won is not weak by saying, "The Korea-Japan currency swap can be discussed more from the perspective of normalizing international relations and economic cooperation between Korea and Japan rather than economic factors," adding, "I think it has symbolic importance as a sign that economic relations between the two countries, including economic exchanges and corporate investment, have been restored, not necessarily for exchange rate stability." Companies are not pleased with the yen's decline. Kim Jeong-sik, emeritus professor of economics at Yonsei University, expressed concern, saying, "If the yen weakness and won strength trend continues, it could be a burden for some companies with high export competition with Japan."