iM Securities identified the Bank of Japan (BOJ)'s interest rate decision and whether concerns over an artificial intelligence (AI) bubble will subside as key variables in the foreign exchange market this week. The company suggested a weekly dollar-won exchange rate band of 1,450 to 1,490 won.
On December 15, Park Sanghyun, a researcher at iM Securities, stated in a report titled "The Foreign Exchange Market Facing Heightened Anxiety Ahead of the Year’s High," "With the dollar-won exchange rate increasingly likely to threaten its yearly high, attention is focused on whether the foreign exchange authorities will intervene." As of 2 p.m. on December 13, the dollar-won exchange rate stood at 1,477 won, up from the previous week.
First, Park highlighted that despite the dovish outcome of the December U.S. Federal Open Market Committee (FOMC) meeting last week, both the Korean won and the Japanese yen weakened. He explained, "Contrary to concerns, the market interpreted the rate cut as dovish rather than hawkish, which increased downward pressure on the dollar. In particular, the Federal Reserve's early implementation of the Reserve Management Purchases (RMP), focusing on short-term Treasury bonds, further strengthened expectations for a weaker dollar." However, he noted, "The depreciation of the won against the dollar was particularly pronounced."
He attributed this to the fact that "the weak dollar and net foreign buying of Korean stocks have not been sufficient to alleviate concerns about further weakness in the won." The Japanese yen also weakened last week, as fiscal risks in Japan came to the forefront despite the weak dollar and expectations of a BOJ rate hike. In contrast, the euro, the Chinese yuan, and the Australian dollar continued to show strength.
Park predicted that this week's monetary policy decisions by the European Central Bank (ECB, December 18) and the BOJ (December 19) would have a significant impact on the dollar. He said, "It will be important to see whether the ECB sends a hawkish signal and whether the BOJ hints at additional rate hikes following its December increase. The spread of renewed AI bubble concerns will also be a key issue for the foreign exchange market."
He projected a dollar-won exchange rate band of 1,450 to 1,490 won for this week, diagnosing that "the BOJ's monetary policy and the spread of AI bubble concerns are expected to increase volatility in the dollar-won exchange rate."
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