[Why&Next]Why Exchange Rate Forecasts for the "Turbulent Fourth Quarter" Are Split Between 1,450 Won and 1,350 Won

350 Billion Dollar U.S. Investment Negotiations: The Key Variable for Year-End Exchange Rate Levels
Attention on Whether Korea's Position Will Be Reflected, Uncertainty Until Year-End
"Could Far Exceed 1,400 Won"
Rapid Reversal Possible If

In October, marking the start of the fourth quarter of this year, the average won-dollar exchange rate has once again risen above the 1,400 won mark. With the outcome of the 350 billion dollar investment negotiation with the United States remaining a key variable, expert opinions on the year-end exchange rate level are divided.

According to the Bank of Korea's Economic Statistics System (ECOS) on the 5th, the weekly closing average won-dollar exchange rate from the beginning of this month to the 2nd, just before the Chuseok holiday closure, was 1,401.6 won, surpassing the 1,400 won level for the first time in six months since April (1,441.9 won). This is the result of continued downward pressure on the won, as Korea-US trade negotiations regarding the 350 billion dollar US investment remain at an impasse.

Following the resumption of interest rate cuts by the US Federal Reserve (Fed) in mid-September, the dollar index fell to 96 points and the won-dollar exchange rate dropped to the high 1,370 won range. However, as Fed Chair Jerome Powell and other Fed officials adopted a hawkish stance regarding the pace of further cuts, the dollar made a modest rebound. During the slight uptick in the dollar index, the value of the won declined even more sharply. Anxiety was heightened when US President Donald Trump pressured Korea, calling the 350 billion dollar US investment a "prepayment."

Focus on Whether Korea's Position Will Be Reflected, Uncertainty May Last Until Year-End..."Could Easily Exceed 1,400 Won"

Experts believe that the period around the Asia-Pacific Economic Cooperation (APEC) Summit, to be held in Gyeongju, North Gyeongsang Province at the end of this month, will be a turning point in determining the future path of the exchange rate. Depending on whether Korea-US tariff negotiations are resolved positively at the APEC Summit, the year-end exchange rate could settle in the mid-1,300 won range or soar well above 1,400 won.

Those who expect the 1,400 won level to persist until year-end believe that it will be difficult to make rapid progress on concrete negotiations regarding the US investment before the APEC Summit. Above all, unless an agreement reflecting Korea's positions-such as a currency swap arrangement or long-term phased investment-can be reached, the exchange rate is expected to remain near the 1,400 won level. The Korean government is aiming to sign a memorandum of understanding (MOU) on the US investment during the APEC Summit and has sent a revised MOU proposal to the US side, awaiting a response.

Lee Juwon, an economist at Daishin Securities, said, "With uncertainty remaining over Korea-US tariff negotiations and foreign investor sentiment toward Korean assets damaged, the upper end of the exchange rate is being pushed higher." He added, "Although the US resumed rate cuts last month, doubts persist about the pace of further cuts, and political uncertainty remains in the eurozone and elsewhere. The possibility that fiscal risks could emerge in major advanced economies could also increase exchange rate volatility." Lee predicted that the won-dollar exchange rate could rise to 1,450 won over the next three months.

The recent relative weakness of the won against the dollar is also attributed to changes in the supply-demand structure, as more domestic investors-known as "Seohak Ants"-have been investing in overseas stocks. Min Kyungwon, an economist at Woori Bank, said, "The structural changes in the domestic foreign exchange market's supply-demand environment will continue in the fourth quarter," adding, "Reflecting the significant increase in onshore dollar demand, we maintain our outlook for a rising won-dollar exchange rate." The expansion of foreign net purchases of Korean stocks is expected to be offset by the net purchases of US stocks by Seohak Ants, making it difficult for the won to strengthen as it did in the past.

He noted, "While the likelihood of an actual 350 billion dollar cash prepayment to the US is low, the relocation of domestic companies' overseas production bases is likely to proceed regardless of Korea-US tariff negotiations." He added, "An increase in US investment will act as a factor increasing downward pressure on the won, as it will boost real dollar demand for equity investments and reduce the conversion of export proceeds into won for reinvestment." Min forecasts the year-end won-dollar exchange rate to be around 1,420 won.

If an Agreement Is Reached Around APEC, Could Fall to Mid-1,300 Won Range...US Government Shutdown and Next Fed Chair Issues Also Factors for a Weaker Dollar

However, experts generally agree that if uncertainties related to Korea-US negotiations and other issues are resolved, there is a high possibility of a sharp reversal in the exchange rate. If the APEC Summit produces an image of the US-China tariff war converging toward an agreement, this would also be a positive factor for risk assets. Park Sanghyun, a researcher at iM Securities, predicted, "If the US investment negotiations are concluded in a form that reflects the investment ratio and other terms proposed by Korea, the won-dollar exchange rate could fall to the 1,360 won range."

Concerns about a slowdown in the US economy due to a temporary US federal government shutdown are also supporting a weaker dollar. Amid a standoff between the ruling and opposition parties over the US budget, the US federal government entered a shutdown starting on the 1st. Baek Seokhyun, an economist at Shinhan Bank, said, "Although US federal government shutdowns have not been a significant factor in the foreign exchange market in the past, if President Trump leverages this politically, the situation could change," adding, "if it is used as a tool to lay off large numbers of Democratic-leaning public servants and, in turn, leads to worsening employment data and weakening consumer sentiment, this could pressure the Fed to cut rates and become a factor for a weaker dollar and a stronger won."

News related to candidates for the next Fed chair is also seen as boosting expectations for rate cuts and supporting the won's strength. Baek added, "If US Treasury Secretary Scott Besant interviews candidates for the next Fed chair this month and narrows down the final candidates, the emergence of the next chair could become a factor for a weaker dollar." Baek forecasts the average won-dollar exchange rate in the fourth quarter to be around 1,385 won.