Exchange Rate Breaks 1400 Won After Trump Victory, Expected to Rise Further [Impact of US Presidential Election]

Won-Dollar Exchange Rate Surpasses 1400 Won Intraday
Dollar Strength Expected to Continue for Now
Foreign Exchange Authorities' Intervention Also a Variable
Market Interest Rates Rising Amid Possible Delay in Rate Cuts

With Donald Trump elected as the next President of the United States, the won-dollar exchange rate surpassed 1,400 won during the trading session, and government bond yields soared, causing a significant market reaction. This is because Trump's America First policy is expected to strengthen the dollar, push up inflation, delay the Federal Reserve's (Fed) interest rate cuts, and thus have a negative impact on the South Korean economy.

Market forecasts suggest that the won-dollar exchange rate could rise to the 1,420 won range within the year, and the Bank of Korea's base rate cuts may be delayed more than expected. Whether the foreign exchange authorities intervene is also expected to be a variable affecting the exchange rate.

Won-Dollar Exchange Rate Expected to Surpass 1,400 Won Following Trump's Election

On the 7th, in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,399.30 won at 2 a.m. based on the closing price. The exchange rate reached its highest level in about two years since November 7, 2022, based on the previous day's 3:30 p.m. closing price of 1,396.2 won. It even surpassed 1,400 won during overnight trading.

The surge in the won-dollar exchange rate is due to expectations that Trump's re-election will intensify America First policies. Trump has pledged to impose a 60% tariff on Chinese imports as well as a universal tariff of 10-20% on all imports entering the U.S. With the Republican Party controlling not only the White House but also both houses of Congress in a red sweep, the likelihood of Trump's pledges becoming reality is high. If the universal tariff is introduced next year and South Korea's trade balance worsens, it will exert downward pressure on the won.

Choi Ye-chan, a researcher at Sangsangin Securities, said, "With Trump's return, pressure for a strong dollar has expanded, making a decline in major currencies inevitable. If the universal tariff is introduced and South Korea's trade balance worsens, upward revisions to the won-dollar exchange rate forecasts are unavoidable."

In addition to tariff hikes, Trump's announcement of large-scale tax cuts, which will worsen the U.S. fiscal deficit, is also a factor strengthening the dollar. If the U.S. issues more government bonds to address the fiscal deficit, inflationary pressure will rise, potentially delaying interest rate cuts.

Jin Ok-hee, a researcher at Hana Financial Research Institute, analyzed, "Trump's large-scale tax cut policy, the possibility of intensified trade conflicts, and immigration restrictions have reignited inflation concerns, contributing to the dollar's strength. In particular, intensified trade conflicts and immigration restrictions could act as downward pressures on not only the U.S. but also global economic growth, leading to a preference for safe assets and a stronger dollar."

Jin predicted, "Due to increased policy uncertainty following Trump's election, the won-dollar exchange rate could rise to 1,420 won in the short term."

Heo Moon-jong, head of the Woori Financial Management Research Center, also observed, "Although Trump superficially supports a weak dollar to reduce the trade deficit, protectionist policies, extended tax cuts (which increase the fiscal deficit), and strengthened immigration policies exert upward pressure on the dollar. There is a possibility of a temporary sharp rise in the won-dollar exchange rate following Trump's election."

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Possibility of Slowing Interest Rate Cuts Due to Inflation Concerns

Trump's victory is expected to put upward pressure on domestic and international market interest rates. Following the news of Trump's election, government bond yields rose across the board. In the Seoul bond market the previous day, the 3-year Treasury bond yield closed at 2.960%, up 4.2 basis points (bp) from the previous trading day. The 10-year yield rose 6.1 bp to 3.134%. The 5-year and 2-year yields increased by 5.2 bp and 4.1 bp, closing at 3.023% and 2.980%, respectively.

Seo Sang-young, a researcher at Mirae Asset Securities, said regarding the sharp rise in the U.S. 10-year Treasury yield, "This reflects expectations that government bond issuance could increase significantly and that trade disputes may push up inflation again, limiting the Fed's ability to cut interest rates."

With Trump's re-election, interest rate cuts by both South Korea and the U.S. are likely to be delayed. In the U.S., rapid rate cuts could raise inflationary pressures, and in South Korea, where rates are already low, it is difficult to cut the base rate faster than the U.S.

There are also concerns that the Bank of Korea's rate cuts have become more difficult as the exchange rate soars, since rate cuts could further push up the won-dollar exchange rate. Lee Chang-yong, Governor of the Bank of Korea, said during a meeting with reporters in Washington D.C. at the end of last month, "The exchange rate has risen much higher and faster than we want. The exchange rate, which was not a consideration at the last Monetary Policy Committee meeting in October, has now become a factor to consider again."

Im Jae-kyun, a researcher at KB Securities, diagnosed, "Unlike when the Bank of Korea cut rates in October, the governor mentioned that exchange rate volatility has increased and must be considered. The uncertainty of Trump's policies could increase exchange rate volatility, which is a cautious factor for the Bank of Korea's additional rate cuts."