"US Interest Rates Won't Drop in June Either"... Exchange Rate Hits Highest in 17 Months

US CPI Exceeds Expectations, Halting 'June Rate Cut' Speculation
Exchange Rate Hits Highest Intraday Level Since November 2022

[Image source=Yonhap News]

The won-dollar exchange rate surged following the release of the US Consumer Price Index (CPI) that exceeded expectations and the 'hawkish' minutes from the Federal Reserve (Fed) monetary policy meeting. On the 11th, the won-dollar exchange rate surpassed 1,360 won in early trading, reaching an intraday high?the highest in 17 months since November 10, 2022 (1,378.5 won).

According to Seoul Foreign Exchange Brokerage, the exchange rate started trading at 1,365 won at 9 a.m., up 10.1 won from the previous day's closing price (1,354.9 won), and as of 9:26 a.m., it was fluctuating in the low to mid-1,360 won range.

The March CPI recorded 3.5%, exceeding the market expectation of 3.4%, dampening the financial markets. On a month-to-month basis, it also surpassed the expected 0.3%, reaching 0.4%, which is likely to increase the Fed's inflation concerns. The inflation surge is driven by rising energy prices due to a rebound in oil prices, high rents, and a sharp increase in automobile insurance premiums, which are leading the rise in service prices.

In particular, the 'supercore inflation' index, which excludes housing costs, energy, and food prices, continued its upward trend, rising 0.65% month-over-month and 4.8% year-over-year. Since the supercore inflation rate excludes volatile items and focuses on the core, it is an indicator closely watched by the Fed. This time, it recorded the highest year-over-year increase in 11 months.

Additionally, the minutes of the Fed's March monetary policy meeting, released on the 10th (local time), showed that the views of the participating members on the monetary policy outlook were relatively hawkish, putting a brake on overall expectations for monetary easing. The minutes from the FOMC meeting held on the 19th-20th of last month stated, "Participants noted indicators pointing to strong economic momentum and disappointing inflation data," and "Members judged that it would be inappropriate to lower the policy rate until there is stronger confidence that inflation is moving steadily toward 2%."

As the possibility of a Fed rate cut in June has effectively diminished, the dollar index also rose across the board. Just before the US CPI announcement, the dollar index was hovering around the 104 level but has now surpassed 105. The yen-dollar exchange rate also broke through 153 yen in the New York foreign exchange market, marking the highest level in about 34 years since June 1990.

The delay in the Fed's rate cut timing is expected to increase the burden of dollar strength and won weakness. Sanghyun Park, a research fellow at Hi Investment & Securities, explained, "It is clear that the possibility of a US rate cut in June has significantly receded," adding, "Regarding the possibility of a rate cut in July, while the possibility remains latent, it will heavily depend on future inflation indicators." Park also noted, "The rise in the exchange rate is assessed to have increased potential risks that could negatively impact the domestic economy and inflationary pressures."

Regarding the won-dollar exchange rate trend, the possibility of further increases should remain open for the time being. Hojung Kim, a researcher at Yuanta Securities, said, "It is expected to steadily rise until the end of May, reaching around 1,390 won, then settle back to around 1,360 won," explaining, "Due to factors such as Korean exporters' payments and foreign dividend conversions occurring at the beginning of the year, the rate is unlikely to fall below 1,300 won and is expected to remain in the 1,360 won range until May."