Foreign exchange experts forecast a weaker dollar this year. The weak dollar outlook that began at the beginning of the year has continued into the second half. Those predicting a weak dollar believe that the policy directions of both the South Korean and U.S. governments will lead to an environment favoring a weak dollar and a strong won.
However, experts' forecasts are rarely accurate. The won-to-dollar exchange rate has paused briefly only to soon eye 1,400 won again. What are the reasons for the sustained dissipation of the weak dollar outlook that has continued since the beginning of the year?
Despite the intentions of the authorities in both countries, a tight currency policy continues, and new variables such as the emergence of cryptocurrencies are solidifying the strength of the dollar. The South Korean government's policy direction also prefers a strong won, but as investments in the U.S. increase, the demand for dollars is not decreasing.
There are also projections that merely sending policy signals will not lead to a significant reversal in the current exchange rate trend in the second half.
This week, in the Seoul foreign exchange market, the won-to-dollar exchange rate recorded 1,377.9 won (as of 3:30 p.m. on the 25th). This week has seen some stagnation, but on the 18th, it briefly hit 1,392.10 won. The exchange rate, which had fluctuated around the mid-1,300s since mid-May, has risen nearly 50 won in two months and has surpassed 1,400 won.
In this month, the dollar index (DXY), which represents the value of the dollar against six major currencies, has recovered to the 98 level for the first time in about a month.
Contrary to expectations that the dollar would struggle, one reason for the dollar's strength is the tight U.S. currency policy. Simply put, it means that the pressure from President Donald Trump to cut interest rates is not working. President Trump is demanding a reduction in the benchmark interest rate, but the U.S. Federal Reserve (Fed) is firmly holding its ground.
This year, the Fed has kept the benchmark interest rate unchanged. After confirming the shock that the Trump administration's tariff policy could bring to the market, it believes there is no rush to initiate rate cuts.
Against this backdrop, the U.S. Consumer Price Index (CPI) for June rose by 2.7% compared to the same month last year, highlighting inflation concerns once again. As a result, President Trump's logic of calling for the dismissal of Fed Chair Jerome Powell, claiming that 'prices are low,' has lost its validity.
At one point pressing for rate cuts and mentioning the resignation of Fed Chair Jerome Powell, President Trump has taken a step back, saying that 'Chair Powell will leave in eight months (actually ten months).' This has been interpreted as a message recognizing the independence of the Fed.
With the deadline for the Trump-imposed tariff approaching on the 1st of next month, the demand for the dollar as a safe asset is also being supported. While tariff negotiations with major trading countries are ongoing, the tariff rate with Japan, which is evaluated as having 'performed well,' is at around 15%. Ultimately, the final tariff rate range is estimated to be between 15% and 40%, preventing investors from feeling reassured.
The strong preference for U.S. stocks among individual investors abroad, known as 'seohakgaemi', is also cited as a reason making the weak dollar difficult. Even if there is a surplus in the current account (exports - imports), the explanation is that if dollars flow out of the country due to overseas stock investments, the exchange rate can only rise.
Park Su-yeon, a researcher at MERITZ Securities, said, 'As individuals investing in overseas stocks have increased while the domestic stock market remains boxed in, the so-called "investment account deficit" has solidified. In the current situation of significant external uncertainty, corporations are also delaying the sale of export proceeds (dollars) to prepare for exchange rate volatility, thus diminishing the current account's influence on the exchange rate.'
There is also the fact that cryptocurrencies have emerged as a new factor supporting the dollar's strength. Recently, the U.S. House passed the 'GENIUS Act', which legislates cryptocurrency 'stablecoins.' This bill mandates that stablecoin issuers must retain collateral in the form of U.S. dollars or government bonds. If the demand for dollars increases in digital assets, it could stabilize the value of the dollar.
Jo Yong-gu, a researcher at Shinyoung Securities, said, 'In a situation where the interest rate gap between the U.S. and Korea has widened to a maximum of 2%, a relatively high exchange rate compared to before can essentially be regarded as a natural phenomenon.'