[금통위poll]②Volatile Forex Market, 'King Dollar' Easing Expected in Q2 Next Year

Strike, Depletion of Excess Savings Expected to Weaken US Consumer Sentiment
"Expectations for Rate Cuts to Rise, Easing Dollar Strength"

As the U.S. Federal Reserve's (Fed) tightening stance prolongs and economic indicators show positive trends, the 'dollar dominance' phenomenon continues. However, domestic experts predict that the strong dollar trend will ease by the end of the first half of next year. Opinions emerged that the tightening level has been reinforced without additional rate hikes within the Fed due to the effect of rising market interest rates, and many analyses suggested that the dollar will turn weaker as expectations for rate cuts grow amid slowing consumption and employment.

On the 14th, an employee is organizing dollars at the Hana Bank Counterfeit Response Center in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

On the 16th, Asia Economy conducted a survey of 22 domestic and international securities analysts, bank and economic research institute economists. When asked about the expected timing for the easing of the strong U.S. dollar, the largest number, 9 respondents (40%), answered the second quarter of next year. Four experts (18%) predicted the first quarter of next year, coming in second.

Excess Savings Depletion and Strikes Make U.S. Economic Slowdown Inevitable... Strong Dollar to Ease by Q2

Last week in the U.S., inflation indicators exceeded market expectations, showing that inflationary pressures remain. As concerns about prolonged high interest rates grew again, U.S. long-term bond yields, which had briefly fallen due to the armed conflict between Israel and the Palestinian militant group Hamas, surged again, and the exchange rate rose to the 1,350 won level. The dollar index, which had dropped to the 105 level, also rose back to 106.

The dollar has been experiencing volatile fluctuations depending on economic indicators. The recent strong dollar phenomenon is based on a robust U.S. economy and high U.S. Treasury yields. Therefore, after the end of the rate hike cycle, as fundamentals stabilize and expectations for rate cuts become visible, the dollar is expected to change direction significantly.

Market experts analyzed that although U.S. consumption growth remains, the prolonged high interest rates and depletion of excess savings make an economic slowdown unavoidable. Kim Sang-hoon, a researcher at Hana Securities, explained, "If the high interest rate tightening intensity is maintained and the economy shows signs of gradual slowdown, rate cuts could be possible around the second quarter, and the point at which the strong dollar trend breaks will likely be similar."

Kim added, "Recently, the Federal Reserve Bank of San Francisco announced that the bottom 80% income group in the U.S. has exhausted excess savings, signaling a future decline in consumer sentiment. Around the turn of this year to next year, U.S. consumption is expected to slow, and unemployment is likely to rise slightly due to the impact of the U.S. auto workers' union strike."

Although inflation risks have reemerged, some view that the core CPI (inflation rate), excluding volatile energy and food prices, continues to slow, indicating that further rate hikes are not necessary. This judgment is expected to more quickly influence adjustments in the dollar's value. Joo Won, head of economic research at Hyundai Research Institute, explained, "Considering that core CPI is declining and prices are not rising significantly, it can be seen that the U.S. has completed its rate hikes. Accordingly, the strong dollar trend is expected to ease within the first quarter of next year."

Three experts (14%) believed the easing would occur within this year. Yoon Yeo-sam, a researcher at Meritz Securities, said, "Concerns that the Fed might raise rates once more this year supported the strong dollar, but if market perception shifts toward the difficulty of an actual hike by the December FOMC, the strong dollar sentiment will ease." He added, "In September, the Fed suggested a 50bp (1bp=0.01 percentage point) rate cut next year, and as this stance becomes more accommodative, the dollar's weakening is expected to deepen, leading to a stable dollar trend through the first half of next year."

10-Year Treasury Yield Hits Peak... "Volatility Expected but Lower Bound to Decline"

The perception that U.S. long-term bond yields have peaked is also a factor that could rein in the surging dollar. Typically, rising U.S. Treasury yields lead to a stronger dollar. Kim said, "The U.S. 10-year Treasury yield reached 4.88% intraday on the 6th, the highest in 16 years since 2007, and it is considered to have already formed a peak in terms of yields. Although volatility will exist, the lower bound of yields will gradually decline, and the foreign exchange market will respond accordingly." Yoon also said, "After the September CPI release, the 10-year yield jumped once more, but the dollar's strength was not as pronounced. It seems unlikely that the dollar will continue to strengthen simply because Treasury yields are high."

However, a minority (3 experts) believed that due to uncertainties such as international oil price volatility caused by the war, the current tightening stance will last longer, and the strong dollar will only fade in the third or fourth quarter of next year. Heo Moon-jong, head of the Economic Global Research Office at Woori Financial Management Research Institute, said, "The current stance is expected to be maintained until the first half of next year, followed by rate cuts starting in the second half, leading to a decline in bond yields and appreciation of the won. However, concerns about prolonged high interest rates remain, so the pace is likely to be gradual."