High Exchange Rates to Continue This Year... 1500 Won Level Should Also Be Considered [The Fall of the Won]③

Exchange Rate Swings in Response to U.S. Tariff Policy Direction...
"Possibility of 1,500 Won Also Open"
If U.S. Tariffs Backfire and Hurt Its Own Economy...
"Volatility Will Be Moderate in the Second Half"
Even if Entering the 1,500 Won Range, There Will Be No Second Foreign Exchange Crisis...
Different from the Past

This year again, the won-dollar exchange rate has been fluctuating wildly. It briefly hit 1,480 won at the end of last year, seemed to stabilize in the 1,430 won range this year, but recently surpassed 1,470 won during intraday trading. It is showing increased volatility in response to the tariff policy moves of the new U.S. Trump administration.

Throughout this year, the pattern of tariff policies initiated by Trump determining exchange rate fluctuations is expected to repeat for a considerable period. The impact of tariff policies is significant, but the timing and intensity are unpredictable, creating great uncertainty. Experts foresee that the strong(?) dollar trend will continue this year as a result. Domestic political and economic situations are also important variables. If political instability continues and economic stimulus signals such as supplementary budgets (chugyeong) are not issued timely, it could stimulate exchange rate increases. In the worst-case scenario, there is even speculation that the exchange rate could enter the 1,500 won range, considered a psychological resistance level.

Exchange Rate Reacts to U.S. Tariff Direction with Ups and Downs... "Possibility of 1,500 Won Also Open"

Experts predict the won-dollar exchange rate trend this year to be 'rising in the first half and stabilizing in the second half.' They forecast a minimum of 1,340 won and a maximum of 1,490 won. Some within the Bank of Korea believe it will be difficult for the rate to fall below 1,400 won. The possibility of exceeding 1,500 won is also raised. According to a survey conducted by the Korea Employers Federation among 100 university economics professors in Korea, they expect the won-dollar exchange rate to reach a high of 1,512 won this year.

Recently, the exchange rate has been most sensitive to U.S. tariff policies. The phenomenon of the exchange rate being controlled by U.S. tariff policies is likely to continue throughout the first half of this year. Moon Jeong-hee, Chief Economist at KB Kookmin Bank, said, "They have announced large-scale tariff impositions, but since it is used as a negotiation tool, it is difficult to predict the timing and intensity," adding, "At least until the first half, it will be a period to confirm this."

President Trump imposes high tariffs on trading partners to protect domestic companies and reduce trade deficits. This raises the prices of imported goods in the U.S., potentially stimulating inflation. If inflation does not fall, the U.S. Federal Reserve (Fed) will have less justification to lower interest rates. If the pace of rate cuts slows, capital may flow into the U.S., further increasing the dollar's value. Park Sang-hyun, Senior Advisor at IM Securities, predicted, "If President Trump's tariff policy remains unpredictable and the Fed delays rate cuts, the possibility of 1,500 won is also open."

Domestic political instability triggered by emergency martial law and impeachment is also hindering the decline of the exchange rate. However, experts expect the resulting financial instability to be resolved within the next 2 to 4 months. In politics, the dominant view is that the Constitutional Court will issue an impeachment decision on President Yoon Seok-yeol in April, followed by an early presidential election in May or June. The bigger problem is the contraction of economic sentiment and the resulting sluggish domestic demand. The Korea Institute of Finance stated in its report "Recent Won-Dollar Exchange Rate Trends and Policy Implications" that "Political uncertainty is not considered a fundamental factor driving exchange rate increases," diagnosing that "economic factors are playing a more significant role."

Therefore, if domestic demand stimulus measures such as supplementary budgets are not implemented in the first half, there is concern that the Korean economy could push the exchange rate higher. Park said, "If domestic political uncertainty continues into the second quarter and the supplementary budget is delayed, it could be a variable making it difficult for the won to appreciate."

If U.S. Tariffs Backfire and Damage Its Own Economy... "Volatility Will Be Moderate in the Second Half"

Experts believe that the won-dollar exchange rate falling below 1,400 won will only be possible in the second half of the year. Park said, "Despite the tariff risks from President Trump, the Fed is expected to resume the rate cut cycle in June," adding, "The yen is showing strength, and the Eurozone (19 countries using the euro) economy is showing signs of bottoming out, which could exert downward pressure on the dollar."

If the market confirms that tariffs are merely a negotiation tool and will not be imposed as promised, the strong dollar trend could weaken further. Lee Young-hwa, Economist at Shinhan Bank S&T Center, said, "The exchange rate nearing 1,490 won last year reflected all the bad factors, so it was somewhat excessive," adding, "Once uncertainty disappears, a strong reversal could also occur." However, Chief Economist Moon predicted, "Even if it is confirmed as a negotiation tool, tariffs are likely to be realized to show results."

High tariff impositions could instead damage the domestic economy. Inflation caused by tariffs lowers the purchasing power of U.S. households, and increased import prices could lead to reduced corporate investment activities. This could impair the U.S. real growth rate. The U.S. think tank Peterson Institute for International Economics (PIIE) recently reported that imposing a 25% tariff on Mexico and Canada alone could reduce U.S. GDP by about $200 billion (approximately 290 trillion won) over four years.

When tariffs imposed to protect domestic industries ironically damage the domestic economy, experts see this as a timing when the strong dollar weakens. Chief Economist Moon said, "Tariffs ultimately have a boomerang effect, so if negative impacts become visible, the Fed is likely to cut rates," adding, "President Trump could also adjust the level and timing of tariff impositions to limit dollar strength."

Even if Entering the 1,500 Won Range, There Will Be No Second Foreign Exchange Crisis... Different from the Past

The won-dollar exchange rate surpassing the 1,400 won range has occurred four times: during the 1997 International Monetary Fund (IMF) foreign exchange crisis, the 2008 global financial crisis, the 2022 U.S.-originated high interest rate shock, and now. Because of this, concerns arise that entering the 1,500 won range might trigger a rapid economic crisis similar to the past, but experts see this as unlikely. Chief Economist Moon said, "The current situation is a problem of difficulties in exchange rate transactions, not a shortage of foreign currency that could escalate into a foreign exchange crisis as in the past."

According to the Bank of Korea, as of the end of January, South Korea's foreign exchange reserves stood at $411.01 billion. Although about $4.6 billion less than a month ago due to use in exchange rate defense, it was $20.4 billion at the end of 1997 and $201.2 billion at the end of 2008.

The IMF stated in its "2024 Korea Article IV Consultation Report" released on the 7th (local time) that "Stress test results indicate that Korea's foreign exchange reserves are at a level sufficient to respond to external shocks." This is interpreted to mean that foreign exchange reserves are stable enough to defend against foreign currency outflows. Baek Bong-hyun, Overseas Investment Analysis Team Leader at the Bank of Korea's International Department, said, "Even if foreign exchange reserves fall below the psychological resistance level of $400 billion, the authorities are believed to have sufficient market response capacity."

However, a continuous rise in the won-dollar exchange rate could be a significant source of instability for the domestic economy. Especially, what the government and market focus on is volatility rather than the exchange rate level. Chief Economist Moon said, "It is not important whether it is in the high 1,400s or entering 1,500 won, but rapid fluctuations in a short period cause greater shocks to the economy," adding, "High volatility reduces predictability for exporters, importers, consumers, and foreign investors, making flexible responses difficult and potentially contracting economic activities."