[Why&Next] The Plummeted Exchange Rate Returns to the 1300 Won Range... Entering a Wait-and-See Mode

The won-dollar exchange rate, which had sharply dropped in the short term due to the effect of the short-selling ban, rose back to the 1,300-won level on the 7th. After plunging earlier this month amid the U.S. Federal Open Market Committee (FOMC) event, the exchange rate reversed to an upward trend on the 7th after four trading days, probing its future direction. It is expected that the won-dollar exchange rate will enter a pause ahead of the U.S. consumer price index announcement on the 14th. Market experts forecast that after recovering from the excessive drop below the 1,300-won level the previous day, the exchange rate could raise its target to 1,360?1,370 won by the end of the year.

According to the Seoul foreign exchange market on the 7th, the won-dollar exchange rate closed at 1,307.9 won, up 10.6 won from the previous day. After plunging 25.1 won to 1,297.3 won the day before, the exchange rate halted its decline and turned upward on this day.

With growing expectations that the U.S. Federal Reserve (Fed) will end its rate hikes, the exchange rate, which had been declining for three consecutive trading days, reversed to an upward trend after four trading days and closed in the low 1,300-won range in the late session. The exchange rate, which had plunged earlier this week due to the FOMC meeting, remarks by Chairman Jerome Powell, and slowing U.S. employment data, partially retraced its decline amid concerns of an excessive short-term drop.

Park Sang-hyun, a researcher at Hi Investment & Securities, said, "The expectation of the end of U.S. rate hikes revived risk appetite, and together with the government's full ban on short selling and foreign investors' net buying in the domestic stock market, this led to the recent sharp drop in the exchange rate." He added, "However, since the short-term decline in the won-dollar exchange rate was excessive, it remains to be seen whether this will lead to a sustained downward trend." He explained that because there is no strong momentum confirming that the domestic economic fundamentals support won strength, the exchange rate is likely to fluctuate around the 1,300-won level going forward.

In particular, experts judged that it is still premature for the won-dollar exchange rate to shift to a sustained downward trend. Although the perception that the U.S. rate hike cycle has ended following the consecutive rate hold decisions at the November FOMC on the 1st (local time) is spreading, this may be an overly optimistic view. On the same day, Neel Kashkari, president of the Minneapolis Federal Reserve Bank, warned that although recent inflation pressures have eased, it is still too early to declare victory over inflation. Kashkari said on the 6th (local time), "There have been hopeful indicators related to inflation over the past three months, but that alone is not enough," and expressed concern that "more data is needed to confirm whether the genie of inflation has been put back in the bottle." If the U.S. consumer price index released on the 14th exceeds market expectations, the possibility of additional tightening cannot be ruled out, which could exert upward pressure on the won-dollar exchange rate.

The fact that the effect of the short-selling ban, which temporarily pulled down the won-dollar exchange rate, is not sustained may also influence the exchange rate going forward. Park Soo-yeon, a researcher at Meritz Securities, said, "The government's full ban on short selling pulled down the exchange rate, but this may be a temporary factor," adding, "Considering that macro uncertainties have not been resolved and it is too early to predict the development of geopolitical conflicts, this is not the start of a full-fledged weak-dollar trend." From a long-term perspective, the short-selling ban could negatively affect the domestic stock market and become a negative factor that pushes the exchange rate higher.

Baek Seok-hyun, an economist at Shinhan Bank, said, "Since the exchange rate drop over the past few days was excessive, a rebound is expected," and added, "Short selling was just a temporary event, and its impact on the exchange rate is minimal." Baek also noted, "Although Chinese economic indicators have avoided the worst-case scenario, concerns such as the real estate crisis remain, so the won is not strong enough to lead a significant appreciation." He added, "The Taiwanese presidential election scheduled for January next year could also be a variable, and there is expected to be market impact around the candidate registration date on the 20th." Shinhan Bank predicted that after bottoming out in the high 1,290-won range the previous day, the exchange rate could rise to 1,360?1,370 won by the end of the year.

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