"When Should I Exchange for My Year-End U.S. Trip?" Betting on Further Exchange Rate Drops in H2 [Practical Finance]

First Half Ends at Year's Low of 1,350 Won After Threatening 1,500
Further Decline Expected in Second Half, Lower Bound Projected at 1,300 Won
"U.S. Stimulus Policies and Private Investment" Could Lead to Year-End Rebound... Timing Is Key

Jang Hyunseok, an office worker, has been planning a family vacation to New York, USA at the end of this year, and began preparations at the start of the year. Since the entire family is traveling together, the costs are significant. While preparing, the won-dollar exchange rate surged to nearly 1,500 won, making it difficult to exchange currency in advance. Although the exchange rate has recently shown signs of stabilizing, Jang finds it hard to decide when to exchange money, thinking it could drop further in the second half of the year.

Not only Jang, who needs to exchange money for his trip to the United States, but also export and import companies that conduct transactions in dollars, as well as individual investors in overseas stock markets, are closely watching the won-dollar exchange rate trend for the second half of this year. The reason is clear: the won-dollar exchange rate, which had soared and threatened the 1,500-won mark, closed at 1,350 won on the last trading day of the first half, marking the lowest level of the year. This means that, despite the domestic political turmoil caused by uncertainties over tariffs following the election of U.S. President Donald Trump at the end of last year and the 12·3 emergency martial law situation, the exchange rate has returned to the level of mid-October last year (October 11, 1,349.5 won).

Fading U.S. Exceptionalism, Dollar Index Down 10.8% in H1

Experts unanimously agree that there is a high possibility of a further decline in the won-dollar exchange rate in the second half of the year. Some even predict that the lower bound could reach 1,300 won. The fundamental reasons cited for this expected decline are the weakening of U.S. exceptionalism and the global shift away from the dollar by major investors. They point to signs of prolonged weakness in leading economic indicators and ongoing trade environment uncertainties, making a slowdown in U.S. economic vitality inevitable. Moody's downgrade of the U.S. credit rating is also seen as a factor weakening trust in U.S. assets and contributing to the dollar's depreciation.

Accordingly, analysts expect the dollar index?which measures the value of the dollar against the currencies of six major countries?to show a moderate weakening trend in the second half. Due to expectations of declining U.S. exceptionalism, the dollar index dropped by 10.8% in the first half of this year. This has even raised concerns about the dollar's status. In a survey of 49 economists by a foreign media outlet, over 90% of respondents expressed concerns about the weakening of the dollar's role as a safe-haven asset.

Lee Sangwon, head of the Foreign Exchange Analysis Department at the International Finance Center, observed, "With the conditions for a weak dollar maintained due to the weakening of U.S. exceptionalism in the second half of this year, the won-dollar exchange rate will also be linked to the weak dollar." Kwon Amin, a researcher at NH Investment & Securities, said, "Previously, the trend of a strong dollar was supported by government fiscal spending that underpinned U.S. exceptionalism. However, after the credit rating downgrade, concerns about fiscal spending are now translating into worries about U.S. assets, so further dollar weakness is likely." He added that, considering weak economic indicators such as retail sales and gross domestic product (GDP), it is premature to say that the current weak dollar trend has bottomed out.

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Expectations for New Government Stimulus... Improved Foreign Capital Inflows

Expectations for economic stimulus from the new government have also been cited as a factor supporting continued won strength in the second half. The domestic political uncertainty that followed the 12·3 emergency martial law situation at the end of last year has been resolved, and growing expectations for improved fundamentals due to expanded fiscal spending by the new government are expected to further drive down the won-dollar exchange rate in the second half.

Increased domestic investment, which had been subdued, is also expected to support won strength. Researcher Kwon explained, "Since the launch of the new government, major companies have announced large-scale domestic investment plans. If surplus retained earnings held by overseas subsidiaries are repatriated, the exchange rate could fall further." When overseas retained earnings were repatriated following the revision of double taxation rules at the beginning of 2023, the exchange rate quickly dropped to the mid-1,200-won range. Rising stock prices and increased foreign capital inflows, coinciding with the launch of the new government, are also reinforcing expectations for a further decline in the exchange rate.

The continued strength of Asian currencies is another point to watch. In particular, analysts note that the value of the Taiwan dollar against the U.S. dollar has reached its highest level in three years, driven by demand for currency hedging from Taiwanese insurance companies. If this trend continues, the won?which is classified as a proxy currency?could also come under upward pressure. Lee added, "It will be important to closely monitor the spillover effects of Taiwan dollar volatility going forward."

U.S. Stimulus Policies and Private Investment... Possibility of Exchange Rate Rebound by Year-End

However, there is also the possibility of a rebound in the won-dollar exchange rate toward the end of the year, so experts advise closely monitoring the timing of currency exchanges and investments betting on a falling exchange rate. Kim Yumi, an economist at Kiwoom Securities, said, "The won is likely to remain strong through the third quarter of this year, and the won-dollar exchange rate could fall to the low 1,300-won range." However, she added, "With the U.S. private sector investment cycle, especially in the artificial intelligence (AI) industry, still robust, and with tax cuts and deregulation, expectations for a U.S. economic recovery could form by year-end."

Lee Juwon, an economist at Daishin Securities, commented, "In the long term, the U.S. economy is expected to improve thanks to stimulus policies. Trust in dollar assets is also likely to recover." He continued, "Although doubts remain about the fiscal capacity to implement these policies, making it too early to expect a rebound, if uncertainty is resolved through the establishment of the fourth-quarter budget this year, a rebound is possible." In this case, he expects to see a bottom in the third quarter, followed by a rebound in the fourth quarter.

Additionally, if Korean companies rapidly expand their production facilities in the United States, demand for dollar exchanges could increase, exerting upward pressure on the won-dollar exchange rate.