Won-Dollar Exchange Rate Hits 6-Month Low
Impact of US Interest Rate Cut and China Economic Stimulus
Forecast for Downward Stabilization
After closing higher on strong economic indicators, the U.S. stock market saw the KOSPI start slightly up on the 27th but then turn downward, showing a weak decline. Various indices are displayed as employees work in the dealing room at the Seoul Hana Bank headquarters. Photo by Heo Younghan younghan@
Following the United States' significant cut in its benchmark interest rate and China's introduction of economic stimulus measures, the won-dollar exchange rate hit its lowest level in six months. With the U.S. Federal Reserve (Fed) signaling further rate cuts within the year and the yuan, which is closely linked to the won, strengthening, a downward stabilization of the won-dollar exchange rate is expected.
On the 27th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,317.7 won, down 9.5 won from the previous trading day. This is the lowest level since March 14, when it recorded 1,314.2 won based on the opening price. As of 10:02 a.m., it was trading slightly higher at 1,319.9 won.
The decline in the won-dollar exchange rate is attributed to the Fed's big cut of 0.5 percentage points in the benchmark interest rate last week, which weakened the dollar.
The dollar index, which measures the dollar's value against six major currencies including the euro and yen, currently stands at 100.64, the lowest this year. The U.S. rate cut has weakened demand for the dollar, considered a safe-haven asset, leading to dollar weakness and a rise in the won's value.
The yuan's strength, following news that the Chinese government is considering large-scale economic stimulus measures, is another factor contributing to the decline in the won-dollar exchange rate. On the 24th, the Chinese government announced plans to lower interest rates soon and inject long-term liquidity of 1 trillion yuan (approximately 189.4 trillion won) into the financial market as part of its economic stimulus policy.
Following the Chinese government's announcement, major Chinese stock markets rose, and the yuan's value reached its highest level in one year and four months. The won, which has a strong correlation with the yuan in the foreign exchange market, is also interpreted to have been affected.
Min Kyung-won, a researcher at Woori Bank, analyzed, "The yuan showed strength due to expectations of China's economic stimulus, and the won also strengthened by following the yuan's appreciation."
Experts expect the won-dollar exchange rate to stabilize downward at least until the end of the year. With the Fed and major countries worldwide, including South Korea, joining the trend of cutting benchmark interest rates, the possibility of the dollar's value falling further is seen as high.
In particular, there is a prevailing forecast that the Fed will cut the benchmark interest rate by an additional 0.5 percentage points in November. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a 0.5 percentage point rate cut at the November Federal Open Market Committee (FOMC) meeting is 59%.
Researcher Min said, "In the fourth quarter, the won-dollar exchange rate could enter the 1,280 won range due to a temporary decrease in dollar demand and concentrated negotiation volumes from exporters," and projected the fourth-quarter exchange rate to be between 1,280 and 1,350 won.
However, the possibility of a sharp decline in the won-dollar exchange rate is not expected to be high. Moon Da-woon, a researcher at Korea Investment & Securities, stated, "The current dollar index level already reflects the Fed's steep rate cuts, so the likelihood of a further sharp drop is low," and forecasted the average won-dollar exchange rate in the fourth quarter to be around 1,325 won.
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