[New York Diary] "King Dollar" Stirs with Trump... Is the 1,400 Won Exchange Rate Coming?

The upward trend of the won-dollar exchange rate has been steep. On September 28, the rate was about 1,310 won per dollar, but by October 25, it had jumped to around 1,390 won. While it might be expected that a weaker won would benefit export companies, this is no longer necessarily the case. Domestic economic experts are instead emphasizing concerns. Overseas production has increased significantly, and the weaker won could push up the prices of imported goods, thereby raising the inflation rate. In particular, with the U.S. presidential election just ten days away and the growing possibility that Republican candidate and former President Donald Trump could win, there are worries that the won-dollar exchange rate could remain high for an extended period. Most observers believe it will be difficult to return to the 1,100-won range of the past. While strengthening the won could alleviate these concerns, the current weakness of the won is caused by such a complex set of factors that it is difficult for the government to address by simply selling dollars and buying won in the foreign exchange market.

First, the U.S. dollar itself is extremely strong. The U.S. Federal Reserve cut its benchmark interest rate by 0.5 percentage points last month and was expected to accelerate further rate cuts. However, subsequent economic indicators have made significant cuts more difficult. A series of indicators, including stronger-than-expected employment and consumption, have shown that the U.S. economy remains robust, lending weight to forecasts that rate cuts will be gradual. The market also expects that rapid rate cuts in the U.S. will be difficult, with the yield on 10-year U.S. Treasury bonds rising from 3.7% on October 1 to the 4.2% range by October 25.

In addition, the Bank of Korea's 0.25 percentage point rate cut on October 11 has also contributed to the weakness of the won. The current U.S. benchmark interest rate stands at 4.75-5.0%, which is 1.75 percentage points higher than South Korea's rate of 3.25%. Heightened demand for safe-haven assets due to instability in the Middle East and uncertainty surrounding the U.S. presidential election has also raised concerns that the won-dollar exchange rate could rise even more sharply. The slowdown in export growth further increases the likelihood of a weaker won. The trend of Korean companies building more overseas factories due to the reshoring of manufacturing in major countries like the U.S., along with increased overseas investments by Korean retail investors, is also fueling demand to convert won to dollars.

In particular, in the increasingly likely scenario of a "Trump second term," a strong dollar is expected, which could further accelerate the weakening of the won. While Trump has pledged a weak dollar to improve the trade balance, experts predict that a Trump victory would actually sustain dollar strength. This is because higher tariffs and reduced immigration would drive up prices, prompting the Federal Reserve to maintain high interest rates, while tax cuts would expand the fiscal deficit and also push up rates. In the securities industry, there are even forecasts that if Trump returns to the White House, the won-dollar exchange rate could surpass 1,400 won.

In this situation, it is questionable whether the government and monetary authorities are responding appropriately. The Bank of Korea, which is responsible for monetary policy, has consistently and significantly missed its economic growth forecasts. In the third quarter of this year, the preliminary real GDP growth rate was just 0.1% compared to the previous quarter, far below the Bank of Korea's forecast of 0.5%. Earlier this year, when first-quarter growth exceeded expectations, the presidential office and government were encouraged, saying the economy had entered a path of private sector-led recovery. Now, however, there is growing concern about stagnation. This has put the Bank of Korea in a dilemma. Falling growth rates are a reason to cut interest rates, but the rising won-dollar exchange rate, the U.S. presidential election, and household debt are all factors that make rate cuts difficult. Even Japan, which is a quasi-key currency country, suffered through the "lost 30 years" due to volatile exchange rates. Can South Korea, which is not a major currency nation, survive such volatility? With the era of a 1,400-won exchange rate looming, we can only hope that these growing concerns prove to be unfounded.