Where is the bottom of the exchange rate…how much further will it go down?

As the won-dollar exchange rate has fallen below 1,300 won, there are expectations that the exchange rate may fall further in the future. Experts are divided between the prospect that this decline is a trend downtrend and that the final interest rate will rise higher than expected and rebound to the 1,400 won level despite the slow pace of US tightening.

According to Seoul Foreign Exchange Brokerage on the 2nd, the won-dollar exchange rate the previous day closed at 1299.7 won, down 19.1 won from the previous trading day. It fell below 1,300 won in four months after last August 5 (1298.3 won).

Based on the closing price of the previous day, it is a level of decline of 10.0% from the high (1444.2 won). The exchange rate fell by 40.5 won over three trading days, falling 13.6 won on the 29th of last month, 7.8 won on the 30th, and 19.1 won on the 1st.

The recent sharp drop in the exchange rate is largely attributable to the weakening of the dollar due to the preference for risky assets following expectations of interest rate hike adjustments by the US Federal Reserve. The dollar index, which represents the value of the dollar against the currencies of the six major countries, which had crossed the 114 line due to concerns about high-intensity tightening, also recently fell to the 104 line.

Fed Chairman Jerome Powell said earlier in a lecture at the Brookings Institution, a think tank in Washington, that “interest rates are approaching a level that will restrain inflation,” adding, “It makes sense to slow the pace of rate hikes in December at the earliest.”

At the same time, he said, “The final interest rate may be higher than expected at the September (4.6%) meeting,” and “we must keep the interest rate high for a considerable period of time.”

The market put more weight on the fact that next year’s base rate will exceed 5%, and although the possibility of raising the final rate remains, the market has focused more on adjusting the pace. It is believed that the market recognized that the policy authorities are turning their attention to economic growth and financial market crunch rather than wary of inflation.

This is because the Fed’s decision to adjust the pace at a time when the effects of the interest rate hike are not showing up in the real economy can be seen as acknowledging that the policy authorities are changing their gaze.

As a result, a 0.5 percentage point increase in the base rate at the Federal Open Market Committee (FOMC) to be held on the 13th and 14th (local time) is becoming a definite fact, but the market’s interest is what the final rate will be and whether it will be raised several more times in the future. moving to ji Even if the FOMC raises the interest rate by 0.5 percentage point in December and slows it down to a 0.25 percentage point hike next year, if the number of hikes increases, the sense of contraction may grow.

The possibility that the dollar will rebound again cannot be ruled out according to the ‘dot plot’ showing future interest rate prospects and Chairman Powell’s remarks that will be released on this day. In the September FOMC dot plot, the maximum upper end of next year was 4.75-5.0%, but the market expects a policy rate of 5% or more to be suggested.

Currently, US economic indicators are mixed. With inflation slowing but still high and the labor market still sound, the possibility of the Fed’s final interest rate higher than market expectations remains open. On the other hand, manufacturing activity is slowing, such as the ISM manufacturing index falling below the baseline (50), putting a burden on interest rate hikes.

In the market, there are mixed views that the exchange rate that fell below the 1,300 won line is a trend change and that it will break through the 1,400 won mark again. Those who believe that the exchange rate will fall further are focusing on the possibility of interest rate cuts and control of the rate hike by the US Fed. On the other hand, those who believe the exchange rate will rise analyze that the US Federal Reserve’s interest rate hike has not yet been completed, and demand for safe assets will appear due to the economic recession.

Jeong Won-il, a researcher at Yuanta Securities, said, “There has been an excessive overshooting of the exchange rate outside the normal range, but I see it as a process of returning to normal.” “As expectations are growing, we expect the exchange rate to continue to fall in the future,” he said.

“The domestic trade balance has not yet improved, but the terms of trade are improving in import and export prices, creating a favorable environment for the value of the won, and the global economic downturn is on the rise, so I wonder if there will be talk of an interest rate cut sooner or later,” he said. “I think it will go back and forth from 1,300 won in December, but it is expected to go down to the early 1,200 won range starting next year,” he said.

On the other hand, some predict that the price will break through the 1,400 won level again next year as uncertainties in the US Fed’s monetary policy and demand for safe assets increase due to the US economic recession.

Kim Yu-mi, a researcher at Kiwoom Securities, said, “There are some parts where the US Fed’s expectations for speed adjustment have led to the weakening of the dollar, but there is still a lot of uncertainty about the Fed’s final rate level and tightening has not yet been completed.” “We do not see it as a trend reversal yet, as it could be a factor for the dollar’s strength on the demand side.”

“It is still difficult to be relieved of the strong won, and the slowdown in interest rate hikes has been a foregone fact, but the market’s interest is shifting to when the hikes will be completed and to what extent,” he said. It can stimulate anxiety and lead to preference for safe assets, leaving open the possibility that the won-dollar exchange rate will rise to 1,400 won early next year.”


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