Hanhwa Investment & Securities: "KRW Weakness Pressure Peaked in Q1 and Eased"

Korea Investment & Securities expects the pressure on the Korean won's weakness caused by political instability and economic sluggishness to ease after peaking in the first quarter.

On the 21st, Moon Da-woon, a researcher at Korea Investment & Securities, stated in the report titled "The Peak of the Won's Double Burden," "Assuming that political instability will be resolved within March, signs of a gradual recovery in the Korean economy will be observed in the second quarter."

Recently, the USD/KRW exchange rate has shown strong downward rigidity around 1,450 won. Despite a significant drop in the dollar index, which measures the value of the US dollar against six major currencies, the won continues to face downward pressure.

Moon cited three reasons for this high downward rigidity, noting, "The biggest reason is that the inherent weakness pressure on the won due to domestic political instability and economic sluggishness remains high." He explained that the impeachment trial of President Yoon Seok-yeol has been delayed beyond market expectations (March 20-21), maintaining a high level of caution. Additionally, the recent decline in the dollar index indicates not only a fall in the US dollar but also a strong rebound in the euro and yen, and the market is watching the possibility of a weak-dollar rebound, which was also pointed out as a background factor.

However, Moon said, "From a psychological perspective as well as from economic and policy standpoints, there is no material factor that would give the won an advantage over the US dollar," but "at least the inherent weakness pressure on the won caused by political instability and economic sluggishness is expected to ease after peaking in the first quarter."

He forecasted that "assuming political instability is resolved within March, signs of a gradual recovery in the Korean economy will be observed in the second quarter," and that the economy, having bottomed out in the first quarter, will show a growth pattern of low in the first half and high in the second half through the end of the year. He added, "While this may not strongly support a sharp appreciation of the won, it will at least create an environment that reduces the inherent weakness pressure on the won, which operates independently from the global US dollar movements."

Domestic demand sentiment, confirmed through key indicators such as the Consumer Sentiment Index, consumer spending plans, and domestic economic outlook, has also shown a gradual recovery since the sharp drop in December last year. Moon added, "After the resolution of political instability, the USD/KRW exchange rate will follow the dollar index downward in directionality, reducing the current divergence."