The won-dollar exchange rate has surpassed 1,450 won for the first time in 15 years. While this increase was initially triggered by the hawkish stance (preference for monetary tightening) of the U.S. Federal Reserve (Fed), structural and long-term conditions such as the depreciation of the yuan due to the inauguration of the new Trump administration, and the outflow of foreign funds from the Korean stock market suggest that the 'won weakness' may accelerate further. Experts assess that the likelihood of the won-dollar exchange rate reaching 1,500 won has significantly increased.
According to the Seoul foreign exchange market on the 19th, the won-dollar exchange rate opened at 1,453 won. This is an increase of 17.5 won from the previous transaction closing price and continues to fluctuate in the early 1,450 won range after opening. This is the first time the exchange rate has surpassed 1,450 won since March 2009 during the global financial crisis.
The rapid rise in the exchange rate on this day was due to the hawkish cut decision by the U.S. Fed overnight. The Fed implemented a rate cut at this year's final Federal Open Market Committee (FOMC). However, the market focused more on the slower-than-expected pace of rate cuts next year. The Fed forecasted, through its newly presented dot plot, that the number of rate cuts next year would be limited to two times. The previous forecast was for four rate cuts.
In addition to the hawkish stance of the U.S. Fed, structural factors in our market also raise concerns about further won weakening. If the new Trump administration officially imposes import tariffs on China early next year, the yuan is likely to depreciate rapidly, and the won might follow suit. Baek Seok-hyeon, a researcher at Shinhan Bank, noted, “During the Trump administration’s first term, the won-dollar was quite sensitive to the U.S.-China trade dispute.”
The fact that the 'Made in China 2025' plan is becoming more apparent is also believed to be accelerating the outflow of foreign capital from the Korean market. Made in China 2025 is a strategic plan for quality growth in manufacturing announced by the China State Council in 2015. China has stated that it will foster ten key industries and 23 sectors to raise the localization rate of key technology components and basic materials to 70% by 2025. Baek, a researcher, said, “There were predictions 10 years ago that Korean manufacturing would suffer the most due to Made in China 2025, but this issue, which was ignored by many, is becoming a reality next year,” adding, “As this situation becomes apparent, the market is showing signs of growing instability.”
Although the negative impact on the exchange rate due to the domestic political situation after President Yoon Suk-yeol's impeachment resolution has somewhat subsided, the lack of strong will from the foreign exchange authorities to defend the exchange rate is also deepening the current trend. Choy Yong-goo, a researcher at Shinyoung Securities, said, “Even considering the recent statements by the Bank of Korea’s governor, intervention in the exchange rate feels theoretical and deferred,” adding, “Concerns about the economy are outweighing, suggesting a slightly higher tolerance for exchange rate losses.”
Experts are valuing the possibility of the won-dollar exchange rate reaching 1,500 won, which has only happened twice before, increasingly highly. The won-dollar exchange rate has only reached 1,500 won twice: during the 1997 IMF foreign exchange crisis and the 2008 financial crisis. Min Kyung-won, a researcher at Woori Bank, said, “It seems necessary to remain open to and prepare for the possibility of the won-dollar exchange rate reaching 1,500 won,” noting that there are currently no domestic or international factors to restrain the dollar aside from intervention by the authorities. An expert who requested anonymity said, “The structural conditions in Korea are not favorable for exchange rate predictions,” adding, “It is evident that the unstable trend will persist at least until the first half of next year.”