On the 11th, the won weakened nearly 6 won against the U.S. dollar. The dollar's weakness followed the U.S. Federal Reserve (Fed) lowering its benchmark interest rate by 0.25 percentage point (p). However, as projections emerged that further cuts may be limited, the decline was capped.
According to the Seoul foreign exchange market that day, the won-dollar exchange rate opened at 1,464.5 won, down 5.9 won from the previous session's weekly transaction closing price (as of 3:30 p.m.). The drop is the largest since the 26th of last month (-7.4 won). Compared with the 2 a.m. closing price, it fell 6.3 won.
Pressure for a lower exchange rate increased as the Fed cut its benchmark rate early that morning. At the Federal Open Market Committee (FOMC) meeting held that day, the Fed lowered the benchmark rate to 3.50%–3.75% per year. With this decision, the interest rate gap between Korea (2.50%) and the United States narrowed to 1.25 percentage points at the upper bound. When the Korea-U.S. rate gap shrinks, foreign capital outflows decrease and the won appreciates.
The dollar index (DXY), which shows the value of the U.S. dollar against the currencies of six major countries, is also weakening. According to Investing.com, as of 9:01 a.m. that day, the DXY was at 98.58, down 0.06% from the previous day. This is the first time the index has fallen into the 98 range since Oct. 28.
However, further declines in the exchange rate appear limited. The Fed is taking a cautious stance on additional cuts, making it difficult for the Korea-U.S. rate gap to narrow further. Fed Chair Jerome Powell said, "The current policy rate is within a broad range of estimates of the neutral rate (the theoretical rate that neither triggers inflation nor deflation and maintains the potential growth rate)," and noted it would be prudent to watch the economy further.
The Summary of Economic Projections (SEP) released by the Fed also suggests the pace of cuts will not be fast. The Fed presented median projections for the policy rate at 3.4% at the end of next year and 3.1% at the end of 2027. Assuming 0.25 percentage point cuts, this means only one cut each next year and the year after.
The fact that rate-cut expectations were already well priced in also had an impact. According to CME Group FedWatch, participants in the federal funds (FF) futures market had been pricing an over-80% probability of a Fed rate cut since the 24th of last month (local time). Right before the decision, it rose to 88.64%, making a rate cut effectively a foregone conclusion.
Min Kyung-won, a Woori Bank researcher, said, "The recent rate cut itself is largely reflected in the exchange rate," adding, "With the Fed cutting rates, dollar weakness will resume, but a sharp decline will be difficult." On the outlook for the exchange rate, Min said, "I think it can stabilize lower through year-end, but it will not be easy to fall below 1,420 won."