On the 16th, the won-dollar exchange rate exceeded 1,400 won for the first time in 1 year and 5 times…down 106 won during the first quarter of this year.
The deepening conflict between Iran and Israel causes international financial markets to fluctuate…affecting the sharp rise in exchange rates.
Eugene Investment says, “Exchange rate, volatility increases… We need to open the upper limit to 1,440 won.”
Possibility of war escalation in the Middle East ↓, expectations of U.S. interest rate cut remain… a red light is on for our economy
◆… The international financial market is fluctuating due to geopolitical risks originating in the Middle East.[Photo = Provided by Clip Art Korea]
The won-dollar exchange rate is soaring. No, rather than an expression like this, it is soaring like the ‘launch of Naro’. Even so, there are concerns that a red light has turned on in our economy, which is suffering from high interest rates, high exchange rates, and high inflation.
On the 16th, the won-dollar exchange rate exceeded 1,400 won during trading for the first time in 1 year and 5 months. The exchange rate hit a high by exceeding 1,384 won as of the closing price on the 15th, and at one point soared to 1,400.24 won on the morning of the 16th. This is a record breaking point for 4 consecutive trading days.
Barely after the first quarter of this year, the exchange rate rose by a whopping 106.50 won. For about four months from the end of last year to April 16 this year, the won-dollar exchange rate was 1,288.0 won (December 28, 2023) → 1,334.60 won (January 31, 2024) → 1,331.50 won (2.29) → 1,347.20 won (3.29) → 1,394.50 won. (4.16) shows a fluctuating flow.
This is the first time that the exchange rate has exceeded 1,400 won since the IMF foreign exchange crisis (1997-1998), the financial crisis (2008-2009), and the Legoland incident (2022).
The decline in the value of the won is gradually increasing due to the geopolitical crisis in the Middle East caused by the deepening conflict between Israel and Iran and the uncertainty of the interest rate policy of the U.S. Federal Reserve (Fed). In particular, the financial market is becoming more volatile after Iran launched a surprise attack on mainland Israel using drones.
In particular, as the possibility of a war crisis in the Middle East is raised, oil prices are soaring, which appears to be stimulating the rate of exchange rate appreciation. Although there are predictions that the situation will enter a lull as Israel refrains from a full-scale offensive against Iran, it appears that anxiety is still playing a big role in the financial market.
In line with this, the fact that the U.S. Federal Reserve continues to postpone the interest rate cut is also a threatening factor for us. Until the end of last year, the Federal Reserve’s interest rate cut was expected around March of this year. However, with retail sales in the U.S. far exceeding market expectations, the prospect that the interest rate cut may be delayed to the second half of the year is gaining weight, and there is also recent speculation that it will be difficult to cut interest rates within this year.
Even as inflation continued, American consumers showed more active consumption than expected, and the consumer price index (CPI) in March rose 0.4% compared to the previous month, exceeding expectations.
According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market now sees a 21.5% chance of a Federal Reserve interest rate cut in June. The probability of freezing rose to the 77% level.
U.S. Treasury yields also rose sharply on this day, along with retail sales indicators, due to heightened tensions in the Middle East. According to CNBC, the interest rate on 10-year government bonds rose more than 11bp (1bp = 0.01%p) on this day to 4.612%. This is the highest level since November last year.
Two-year maturity bonds, which are sensitive to interest rate forecasts, rose more than 3bp to 4.912%. Government bond interest rates and prices move in opposite directions. Some in the market even predict that interest rates may need to be raised again.
The government and financial authorities are evolving as market anxiety spreads due to the sudden rise in exchange rates.
◆… As the exchange rate increase increased and the pace accelerated, the government and financial authorities took action on the 15th and 16th to address the spread of anxiety in the market.[Photo = Jose Ilbo file photo]
On this day, when the won-dollar exchange rate in the foreign exchange market rose to the 1,400 won level at one point during the day, the authorities took steps to verbally intervene, showing efforts to spread excessive anxiety in the market.
The Ministry of Strategy and Finance and the Bank of Korea announced in an emergency notice that day, “Foreign exchange authorities are closely watching exchange rate movements, foreign exchange supply and demand, etc. with special vigilance,” and added, “Excessive concentration in the foreign exchange market is undesirable for our economy.”
Even this morning, the authorities expressed concerns about a sharp rise in the exchange rate. Kim Byeong-hwan, First Vice Minister of Strategy and Finance, emphasized at a joint emergency situation review meeting of related ministries related to the Middle East situation held at the Seoul Government Complex, “If the market shows excessive volatility due to a divergence from our economic fundamentals, we will take immediate and bold action.”
Financial Services Commission Chairman Kim Joo-hyun also held an emergency market review meeting on the 15th and discussed the market impact and response measures due to geopolitical risks in the Middle East. Chairman Kim urged a cool and calm response, saying, “The domestic financial market conditions are good, and the government has sufficient capacity to respond to market instability factors, so there is no need for market participants to be excessively concerned.”
Chairman Kim also assessed that although our financial market is currently showing stability, potential market instability factors still remain, such as increasing uncertainty related to the U.S. monetary policy transition and heightened geopolitical risks in the Middle East.
However, there is great uncertainty about the future direction of the Middle East situation, and if the situation worsens, there is concern that it will have a significant impact on the global financial market, so monitoring will be strengthened and a market stabilization program worth KRW 94 trillion already in operation will be implemented in case market instability occurs. He emphasized that he will actively respond and, if additional measures are necessary, additional measures will be quickly prepared based on close cooperation with relevant ministries.
Stock market: “If there is no expansion in the Middle East… the previous high of 1,440 won will be burdensome.”
Meanwhile, the securities market predicted that if there was no escalation in the Middle East war, the previous high of 1,440 won would be burdensome.
Regarding the recently rapidly rising exchange rate, Eugene Investment & Securities researcher Lee Jeong-hoon said, “The key is whether the increase can be expanded to the 1,444 won level, which is the peak in October 2022,” but added, “However, the won-dollar exchange rate has still risen to the mid-1,400 won range. “It is judged that the possibility of standing up is limited,” he said.
◆… In a report on the 16th, Eugene Investment & Securities forecasted that without an escalation in the Middle East, it would be burdensome for the exchange rate to exceed the previous high of 1,440 won.[Data source = Eugene Investment & Securities report]
Researcher Lee said in an outlook report on this day, “Expectations for an interest rate cut have weakened due to the U.S. CPI in March, and geopolitical issues in the Middle East have also arisen, which can be seen as a very unfavorable combination of negative factors due to the won’s sensitivity to geopolitical issues.”
The pace of the exchange rate, which exceeded 1,400 won for the first time since November 2022, was considered too steep. He expressed concern, saying, “The exchange rate has surged by about 40-50 won in the past week alone,” and “Considering that the relevant issues are still ongoing, it has become difficult to rule out the possibility of exceeding 1,400 won.”
However, this researcher noted that the current situation is different from that of October 2022.
At the time of the relocation, all negative factors at home and abroad overlapped, such as ▲ the Fed’s giant step and concerns about a recession in the United States ▲ the Eurozone energy crisis ▲ China’s zero-corona policy ▲ domestic trade deficit and the Legoland incident, but currently, the expectation of a Federal Reserve cut is maintained. , there is no concern about a recession, and the trade balance is steadily recording a surplus, so it is difficult to say that the situation is more serious than it was in October 2022, at least for now.
At the same time, he diagnosed, “For the exchange rate to rise by a larger amount, an opportunity is needed such that the war intensifies or the possibility of the Federal Reserve lowering interest rates within the year disappears.”
Korea Investment & Securities also said in a report on the same day, “As the pressure of the strong dollar has recently increased and demand for dollars has increased due to foreign dividend payments, the won has recorded the greatest weakness among major currencies in April,” adding to this, the Middle East region’s As risk aversion due to intensifying geopolitical conflict was added, 1,440 won was expected as the second upper level.
Previously, on the 15th, Hana Securities predicted that as war clouds in the Middle East deepened again, the won-dollar exchange rate due to the rise in oil prices around the world would gradually rise until the end of the year, reaching an annual average of around 1,357 won.
If the conflict between Israel and Iran intensifies and the war escalates, Iran, which produces 3.18 million barrels of crude oil per day, could block the Strait of Hormuz and use crude oil supply as a weapon, so there is a high possibility that the dollar will strengthen due to a surge in oil prices.
Economist Jeon Gyu-yeon of Hana Securities predicted this in an outlook analysis report on the 15th, saying, “The problem is that the inflation path in the United States in the second quarter may change due to high oil prices.”
Regarding the fluctuation of the won-dollar exchange rate, researcher Jeon said, “As the dollar-won exchange rate recorded 1,384 won as of today’s closing price and surpassed the first resistance level of 1,380 won, there is a need to leave open the possibility of entering the 1,400 won range in the short term.” .
In addition, “As interest rate cuts by major countries such as the ECB and BOE are implemented independently, the Federal Reserve’s interest rate cuts are pushed back to the third quarter and the number of interest rate cuts is limited to two, the dollar-won exchange rate is expected to trend upward until the end of the year,” he said. He predicted, “The sense of caution about the quarterly US presidential election is also valid.”
At the same time, the average quarterly exchange rate was expected to be 1,329 won in the first quarter, 1,360 won in the second quarter, 1,365 won in the third quarter, and 1,375 won in the fourth quarter, and the average annual exchange rate was adjusted upward to around 1,357 won.
Monetary policy of global central banks shifts toward interest rate cuts
◆…[Data source = Hana Securities report]
If the exchange rate shows great volatility, the impact on our economy is difficult to predict. As the saying goes, ‘A heart that is surprised by Zara, one is surprised by a pot lid’, it is difficult to rule out the possibility that our economic players, who experienced the foreign exchange crisis in 1998 and the financial crisis in 2008, will fall into a state of ‘panic’ beyond concern over the rapidly rising won and exchange rates. see.
As such, exchange rate fluctuations are the most sensitive issue for our trade-oriented economy. However, as Israel decided not to engage in full-scale retaliation due to dissuasion from the United States, the possibility of an escalation of the war decreased, and as the possibility of Iran blocking the Strait of Hormuz also decreased, the atmosphere turned somewhat more positive, and the prevailing view was that the worst situation would not unfold. .
However, since this is also a situation in which no one can be 100% sure, experts suggest that the government and financial authorities should not neglect detailed monitoring and proactive response efforts.
