[Aldonssuljab] Exchange Rate Breaks 1400 Won Amid Trumpnomics Return... Understanding 'Exchange Rate' Easily

Editor's NoteUseful and money-saving miscellaneous encyclopedia. 'Aldonssuljab' will serve you only the truly 'money'-worth information among countless economic articles.

The biggest news of the past week is probably the U.S. presidential election.

The 47th president of the United States has been confirmed as Donald Trump.

With Trump's return, the exchange rate broke through 1,400 won.

What exactly is the exchange rate that causes the market to fluctuate,

and how does the exchange rate affect our economy?

Let's find out.

What is the Exchange Rate?

The exchange rate is the ratio of exchange with a foreign currency.

Let's take the U.S. dollar as an example.

The 'won-dollar exchange rate' refers to how much Korean won is needed to buy one U.S. dollar.

Usually, we say the exchange rate has risen or fallen.

Simply put, if it used to cost 1,200 won to buy 1 dollar, but now it costs 1,400 won to buy 1 dollar, we say the 'exchange rate has risen.'

In this case, the value of the won has fallen, and the value of the dollar has become more expensive.

In other words, the won is weak, and the dollar is strong.

How Does the Exchange Rate Affect Our Economy?

Yonhap News

Then you might wonder,

You understand what the exchange rate is, but what does it have to do with me?

Even if you don't have events like overseas travel or studying abroad, the exchange rate is very important.

A representative example is energy prices.

Since Korea does not produce crude oil, it must rely on imports from abroad.

Because oil prices are settled in dollars, when international oil prices rise, our prices inevitably rise as well.

About 20% of the items Korea imports from overseas are energy-related.

When energy prices rise, not only automobile fuel costs but also various utility bills such as electricity and gas can increase,

and prices of manufactured goods made by processing crude oil can also rise one after another.

The exchange rate is also very important for investors.

You may have seen news that when the exchange rate rises, foreign investors withdraw from our stock market.

When the won is strong, foreign investors can enjoy exchange gains even if the stock price does not rise significantly when they buy domestic stocks.

However, when the won is weak (dollar strong), the trading gains are not large, so investing in the U.S. stock market is more attractive to investors than buying Korean stocks.

Therefore, when the dollar is strong (won weak), investors leave our stock market and the market falls,

and when the dollar is weak (won strong), the opposite happens.

The Return of Trump... What About Exchange Rate and Interest Rates?

A representative policy of President Trump is imposing tariffs and America First protectionism.

Because of this, there are forecasts that Korea's exports and trade balance will worsen.

This also acts as a factor lowering expectations for future economic growth.

The Korea Institute for International Economic Policy analyzed that Korea's total exports could decrease by $5.3 billion to $44.8 billion (about 7.4 trillion to 62.7 trillion won) depending on the tariff imposition scenario.

When exports slow down, it leads to economic slowdown.

This also causes investors to prefer safe assets.

Against this backdrop, Trump's election could lead to a stronger U.S. dollar.

However, some say that the market has already priced in much of this uncertainty,

and the won-dollar exchange rate is expected to peak in the 1,400 won range this year and then gradually fall to around 1,350 won by the end of the year.

Another important point about the exchange rate is that it significantly influences Korea's interest rate decisions.

The U.S. Federal Reserve (Fed), the central bank of the United States, after its Federal Open Market Committee (FOMC) meeting on the 7th (local time),

decided to lower the benchmark interest rate by 0.25 percentage points from 4.75?5.0% to 4.50?4.75%.

As a result, the dollar's strength eased and the exchange rate fell to the 1,300 won range,

but if Trump's tariff hikes materialize, it could induce won weakness and increase exchange rate instability,

so the Bank of Korea is also carefully considering its options ahead of the interest rate decision on the 28th.

Although there is strong demand for rate cuts due to stable inflation and inevitable growth slowdown,

the exchange rate has emerged as a key variable.

So, the exchange rate may seem difficult,

but do you now have some sense of why the exchange rate is important and how it affects our daily lives?

It may be unfamiliar and difficult at first,

but if you practice relating it to your daily life,

you will be able to understand the exchange rate more easily.

I hope this was useful information for our readers today,

and thank you for reading.

'Subscribe' and 'Like' mean a lot to us.