[Trump Again] Trump Inauguration Causes Volatility in Exchange Rates and Interest Rates

Possibility of Continued Dollar Strength and Rising Interest Rates After Trump’s Inauguration
Trump’s Tariff Policies Raise Inflation Concerns and Fuel Dollar Strength
Fed Rate Cuts May Slow, Pushing Market Interest Rates Even Higher

The dawn of the Donald Trump era is a significant source of uncertainty for our financial markets. The America First policy of the Trump administration’s second term could trigger a global dollar strength, potentially pushing the already crisis-level won-dollar exchange rate even higher. Trump’s tariff policies may cause inflation, delaying interest rate cuts not only in the U.S. but also in South Korea, and raising concerns about rising market interest rates.

Possibility of Continued Rise in Won-Dollar Exchange Rate After Trump’s Inauguration

According to Bloomberg and the International Finance Center on the 20th, major global investment banks (IBs) recently forecast in reports that the U.S. dollar could strengthen by more than 5% after Trump’s inauguration. Goldman Sachs analyzed that a robust U.S. economy and the Trump administration’s tariff policies could delay the Federal Reserve’s (Fed) interest rate cuts, which would be a factor supporting dollar strength. Kamakshya Trivedi, an investment strategist at Goldman Sachs, warned, "Due to the Trump administration’s new tariff impositions and the continued boom in the U.S. economy, the dollar could rise by more than 5% this year."

The stronger the dollar becomes, the weaker the won is bound to be. The won-dollar exchange rate has already risen to the mid-1400 won range, a level seen during the 2008 global financial crisis, due to dollar strength and domestic political instability. However, if the dollar strengthens further after Trump’s inauguration, some predict it could reach the 1500 won range.

According to an analysis by the Woori Financial Management Research Institute, if Trump’s tariff policies materialize as expected, the won-dollar exchange rate this year could rise by an average of 145 won annually compared to a scenario without tariff increases. This is expected to negatively impact domestic consumption and investment, resulting in a lower economic growth rate.

Heo Moon-jong, head of the Woori Financial Management Research Institute, emphasized, "The Trump administration’s tariff hikes, tax cuts, and expanded fiscal spending policies could trigger so-called Trumpflation, which may spur dollar strength."

Domestic political turmoil following the imposition of martial law is also a factor accelerating the won’s depreciation. The monthly average won-dollar exchange rate, which was 1394 won in November last year, rose to 1436 won last month when the martial law situation began, and further increased to the 1470 won range this month. In December, excluding Russia, which is at war, the won recorded the largest depreciation among more than 30 major global currencies.

Park Sang-hyun, a specialist at iM Securities, predicted, "Concerns over prolonged domestic political instability could lead to further exchange rate increases. The won-dollar exchange rate’s downward trend can only fully materialize once domestic and international uncertainties ease."

Inflation May Delay Interest Rate Cuts and Push Market Interest Rates Higher

Concerns about rising market interest rates have also grown since the start of the Trump administration’s second term. The recent surge in the 10-year U.S. Treasury yield reflects expectations that the administration’s policies could cause inflation, slowing the pace of interest rate cuts. The 10-year U.S. Treasury yield fell to a yearly low of 3.62% on September 16 last year but then sharply rose, briefly surpassing 4.8% during trading last week.

The International Finance Center evaluated that the Trump administration’s trade and immigration policies, expansionary fiscal policies in various countries, the halt of Russian natural gas supplies to Ukraine, and the spreading expectation of delayed Fed rate cuts are all contributing factors to the rise in long-term interest rates in major countries.

Park Seung-min, a researcher at the International Finance Center, explained, "Concerns are rising that protectionist policies such as tariffs and U.S. immigration restrictions under the new Trump administration could intensify inflationary pressures again, leading to rising interest rates."

U.S. interest rate declines also affect South Korean bond yields. South Korea’s 10-year government bond yield fell to the 2.6% range last month but has since risen to the 2.8% range. Expectations that South Korea’s interest rate cuts will also weaken following the U.S. are being priced in early. Yoon Yeo-sam, a researcher at Meritz Securities, stated, "Expectations for monetary easing have started to retreat domestically following the U.S., and this is being reflected in the domestic bond market."