In the global foreign exchange market, the euro and yen are rising strongly as challengers to the dollar, while the Korean won continues to struggle. Market participants analyze that this is because domestic political uncertainties are persisting, increasing the possibility of an economic downturn. They believe that the exchange rate will stabilize once the impeachment of President Yoon Suk-yeol is confirmed and the supplementary budget is expedited.
◇ Euro breaks $1.09… dollar-yen drops to the 147 yen range
According to Investing.com on the 17th, the euro-dollar exchange rate closed at $1.0832 per euro on the 7th (local time), surpassing the $1.08 mark. This is the highest level in about four months since November of last year. The euro-dollar exchange rate continued to rise and hit $1.09 on the 11th before coming back down to the $1.08 range on the 14th.
The euro fell around the election of former U.S. President Donald Trump, dropping to $1.0216 in January. Some express concern that the "euro-dollar parity" phenomenon (1 euro = 1 dollar) could reoccur. However, recent changes in the European Central Bank's (ECB) monetary policy and Germany's large-scale fiscal stimulus have driven the euro higher.
Germany has decided to create a special fund of 500 billion euros (approximately 787 trillion won) for infrastructure investments in transportation, housing, and more over the next 10 years. This matches the scale of last year's German government budget (465.7 billion euros). Such active fiscal policy is raising expectations for the recovery of the European economy and driving the euro’s strength.
The ECB has contributed to the euro's strength by suggesting that it may reduce the extent of interest rate cuts in preparation for inflation stability and protectionism. Although the ECB lowered the deposit rate, which serves as the benchmark for its monetary policy, from 3.00% to 2.75% at the end of last month, it is expected that there will only be two more rate cuts this year as it maintains a hawkish stance.
The yen has also shown strength this year. The value of the yen, which plummeted due to the Bank of Japan's (BOJ) low-interest-rate policy, turned upward as the pace of interest rate hikes increased this year. The dollar-yen exchange rate, which was close to 160 yen earlier this year, fell to the low 147 yen range on the 11th, marking its lowest level since October 3 of last year. It rose back to the 148 yen range on the 14th but remains at a lower level compared to before.
Market analysts believe that consumer prices in Japan are turning upward and real wages have decreased for the first time in three months, increasing the likelihood of the BOJ implementing additional rate hikes. Currently, there is a high possibility of raising the benchmark interest rate once each in the first and second halves of this year. Therefore, the yen's strength is expected to continue for the time being. The BOJ raised the benchmark interest rate from 0.25% to 0.5% in January.
◇ Struggling won… “The risk of slowing Korean economy has increased”
While the euro and yen are rising strongly as challengers to the dollar, the won still cannot escape its weakness. The won-dollar exchange rate, which surpassed 1,400 won immediately after last December's martial law, recently skyrocketed to the late 1,450 won range. On the 1st, it closed at 1,458.2 won in weekly trading (as of 3:30 p.m.), nearing 1,460 won. The won-dollar exchange rate also closed at 1,453.8 won on the 14th, exceeding 1,450 won.
The main reason why the won shows no signs of strengthening is that domestic political uncertainties persist. Amidst political instability, the direction of government economic policies is unclear, and the likelihood that the Korean economy will be adversely affected amid global economic downturns is increasing, causing foreign investors to prefer other currencies over the won.
The increased likelihood of slowing export growth due to the high-intensity tariff policy of the Trump administration is also adding to the weakness of the won. The Bank of Korea forecasts that the current account surplus for this year will be lower than last year (990 million dollars) at 750 million dollars. This is expected to reduce the domestic supply of dollars and lower the value of the won.
Park Sang-hyun, a researcher at iM Securities, noted that "the recent weakness of the won is due to ongoing domestic political instability, which has led to concerns about corporate credit amid recent events such as Homeplus's corporate rehabilitation application, increasing downward risks for the economy." He added, "Political uncertainties must first be resolved, and then measures like the supplementary budget must follow for the won to have a chance to strengthen."