Russian invasion, oil price rise, US interest rate hike predictions… ‘Cruel Spring’

Won-dollar exchange rate 1230 won in 21 months
US interest rate hike fears over 1,300 won
Crude oil and raw material import prices continue to rise
‘Consumer inflation rate of 4%’ strengthened
“When Russia defaults, there is room for further increase in the exchange rate.
We need to support businesses to create added value.”

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▲ Traders are checking the market situation with their handsets at the New York Stock Exchange on the 7th (local time), when international oil prices reached the highest level in 13 years since 2008 due to Russia’s invasion of Ukraine and the US sanctions on imports of Russian crude oil. The Dow Jones Industrial Average plunged 2.37% and the Nasdaq Index plunged 3.62% on the same day, while stock markets in major countries plunged all at once.
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We are facing a ‘brutal spring’ due to a surge in prices due to the exchange rate. Domestic prices are more affected by the exchange rate than oil prices, because when the exchange rate rises, import prices soar, and prices of all living things that are in contact with people’s daily lives fluctuate at the same time.

●Russian invasion, preference for safe assets and factors for exchange rate rise

In a situation in which international oil prices and the preference for safe assets are pushing up the exchange rate as Russia’s invasion of Ukraine is added to the global supply disruption, the exchange rate may soar to the 1,300 won level if the US base rate hike on the 16th (local time) overlaps. also cannot be excluded. The exchange rate entering the 1,300 won range raises the current 3% level of inflation to the 4% level at once, leading to a trade deficit and economic stagnation, which raises concerns as it can put the Korean economy in a swamp of ‘stagflation’.

In the Seoul foreign exchange market on the 8th, the won-dollar exchange rate closed at 1237.0 won, up 9.9 won from the previous day. It is the first time in a year and 9 months since the won-dollar exchange rate rose to the 1230 range based on the closing price on May 29, 2020 (1238.5 won). Soaring international oil prices are driving the exchange rate appreciation. The exchange rate rises in the foreign exchange market as the demand for foreign exchange to pay the oil price increases, and the deterioration of the trade balance as imports increase due to the rise in oil prices also act as a factor that raises the exchange rate. After Russia invaded Ukraine on the 24th of last month, the exchange rate rose 2.88% in 10 days as international oil prices rose. International oil prices are predicted to soar to $200 a barrel this year as the US decides to push for a bill to ban the import of Russian crude oil, which remains as a ‘last card’.

The US’ aggressive rate hike is also a driving force behind the won appreciation. The Federal Reserve is expected to raise interest rates by 0.25 percentage points at the regular meeting of the Federal Open Market Committee (FOMC) on the 15th-16th of next month. The growing preference for safe-haven assets due to the Ukraine crisis is also steadily raising the exchange rate. The market is predicting that the won-dollar exchange rate will break through 1300 won. The exchange rate has not entered the 1,300 won range since July 13, 2009 (1315 won).

Exchange rates have a greater impact on domestic prices than oil prices

With the rising exchange rate, inflationary pressures are intensifying. An increase in the exchange rate leads to an increase in the import price → an increase in the producer price → an increase in the consumer price. As the exchange rate rises, the prices of agricultural, livestock, and marine products, energy, and raw materials, which have a high proportion of imports, rise, leading to an increase in the cost of living in Korea. Kim Jin-il, a professor of economics at Korea University, said, “Due to the industrial structure that is highly dependent on imports, the high exchange rate has a greater effect on domestic prices than high oil prices.

Inflation has continued to rise in the 3% range for five consecutive months since October last year due to global supply disruptions, but combined with the sharp rise in the exchange rate, the observation that the consumer price inflation rate will enter the 4% range for the first time in about 10 years is gaining strength. Kim Jeong-sik, a professor of economics at Yonsei University, said, “There is already a lot of money in the market, and the overall inflation rate rises due to the exchange rate rise. Cho Dong-geun, professor emeritus of economics at Myongji University, said, “The exchange rate may rise further depending on the international situation, such as whether Russia has declared the ‘default’ on the 16th. The government should avoid rosy economic prospects and support the creation of added value for businesses rather than releasing money,” he suggested.

By Kim Seung-hoon
Reporter Hwang In-ju