Will the Exchange Rate Break the 1300 Won Mark? Three Variables: China Stimulus, Japanese Prime Minister, Middle East War [Why&Next]

Yuan Strengthens Due to China's Economic Stimulus
Yen Strengthens Following Japan's New Prime Minister Election
Weak Dollar Amid US Interest Rate Cuts
However, Escalation of Middle East War Could Increase Upward Pressure

Various indices are displayed as employees work in the dealing room at the Seoul Hana Bank headquarters. Photo by Huh Younghan younghan@

The won-dollar exchange rate, which had briefly risen to the mid-1390 won range last June, has recently continued its downward trend. Along with the global weak dollar, the yuan's strength driven by China's large-scale economic stimulus measures has acted as a factor boosting the won's value. The yen's appreciation following the change of Japan's prime minister further accelerated the decline. Experts believe that with many external variables causing won appreciation, the exchange rate could soon hit the 1200 won range. However, the intensification of the Middle East conflict and the resulting dollar strength could be a variable.

On the 2nd, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,323.8 won, up 16.0 won from the previous trading day. On the evening of the 1st (local time), Iran launched a large-scale ballistic missile targeting Israel, and Israel immediately announced retaliatory measures, raising concerns that the war between Israel and Hezbollah could escalate to Iran, leading to a strong demand for the safe-haven dollar. However, the won-dollar exchange rate, which was in the 1360?1390 won range during June and July, fell to the 1330 won range in August and dropped to 1307.8 won by the afternoon closing on September 30. This marked the lowest level in about nine months since January 3 (1,304.8 won) this year.

Exchange Rate Decline Continues Due to Concurrent Strengthening of Yuan and Yen

The recent sharp drop in the won-dollar exchange rate is interpreted as being influenced by the yuan's appreciation following the Chinese government's announcement of large-scale economic stimulus measures and the yen's strengthening due to the election of Japan's new prime minister, who supports interest rate hikes. In recent years, the Korean won has shown a notable co-movement with the yen and yuan, and this phenomenon is re-emerging.

The won has been particularly affected by the yuan's appreciation that emerged after news on the 24th of last month about the Chinese government's review of large-scale economic stimulus measures. The Chinese government announced a stimulus policy to lower interest rates and supply long-term liquidity of 1 trillion yuan (approximately 189.4 trillion won) to the financial market. Following the announcement, the yuan's value surged to its highest level in one year and four months.

Due to expectations of economic recovery driven by China's strong stimulus measures, the Chinese-speaking stock markets in Shanghai, Shenzhen, and Hong Kong surged more than 15% last week. The Bank of Korea's Beijing office analyzed, "Although the Chinese economy is facing increasing downward pressure, it is expected to show growth in the high 4% range this year, supported by the Chinese government's strengthened policy support to maintain stable economic recovery."

Lee Joo-won, an economist at Daishin Securities, said, "As China has continuously announced stimulus measures, the dollar-yuan exchange rate has widened its decline, and the won-dollar exchange rate has also fallen in tandem. If expectations for China's stimulus are maintained, the yuan's strength will continue."

The election of Shigeru Ishiba, former secretary-general of the Liberal Democratic Party known to support interest rate hikes, as Japan's new prime minister also contributed to the won's appreciation through yen strengthening. The yen, which was considered a 'super yen' after surpassing 160 yen per dollar in mid-year, fell to the 140 yen range following the Bank of Japan's (BOJ) interest rate hike and the U.S. Federal Reserve's rate cut. The BOJ's interest rate hike is a factor that increases the yen's value.

The economist added, "Assuming a soft landing of the U.S. economy, if the yuan and yen continue to strengthen, the won could also follow suit."

With the yuan and yen both appreciating, the dollar is under downward pressure in the global foreign exchange market. The dollar weakened significantly after the U.S. sharply cut its benchmark interest rate and is facing additional downward pressure due to the influences of China and Japan. The dollar index, which measures the dollar's value against six major currencies including the euro and yen, has fallen to around 100, its lowest level this year.

Global investment bank Goldman Sachs recently assessed in a report that the dollar is weakening due to China's stimulus measures and Japan's election. However, it added that further weakening may be limited due to interest rate cuts in Europe.

Could Hit 1200 Won Range... Middle East Conflict Escalation a Variable

Experts believe that due to various external factors, the won-dollar exchange rate could reach the 1200 won range by the end of the year. Min Kyung-won, a researcher at Woori Bank, said, "In the fourth quarter, the won-dollar exchange rate could enter the 1280 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 1280 and 1350 won.

iM Securities also opened the lower bound of its October exchange rate forecast to the 1290 won range, with the upper bound at the 1350 won range. iM Securities pointed out that while external variables suggest a decline in the won-dollar exchange rate, the fragile domestic economic fundamentals will limit further declines.

The intensifying Middle East conflict has emerged as a major variable in the foreign exchange market. If the war between Israel and Iran escalates into a full-scale war, there is a possibility that the dollar will strengthen again. Park Sang-hyun, a specialist at iM Securities, said, "This Middle East situation could be a short-term factor for won depreciation," adding, "The continued geopolitical instability and resulting dollar strength pressure could reinforce won depreciation sentiment."

The Bank of Korea also held a market situation review meeting regarding the Middle East situation on the same day and evaluated that geopolitical tensions have escalated due to Iran's missile attacks on Israel, leading to strength in the dollar and international oil prices.

Yoo Sang-dae, Deputy Governor of the Bank of Korea, said, "Although Iran's attack level is assessed as limited, depending on Israel's response and its intensity, it is not possible to rule out the possibility of increased global risk aversion sentiment, which could expand volatility in domestic and international financial markets."