The won-dollar exchange rate closed at 1484.7 won, down 8.3 won, marking the first time the rate entered the 1480 range since May 12 when it closed at 1489.9 won. The rate dropped about 70 won in two weeks from near 1560 won earlier this month, driven by US inflation slowdown that weakened the dollar and dollar selling by semiconductor and shipbuilding companies. Markets are focused on the Bank of Korea's monetary policy committee meeting on the 16th, with expectations that a rate hike has already been priced in and future rate trajectory will significantly influence whether the exchange rate stabilizes in the 1400 range.
Won-Dollar Exchange Rate Drops 70 Won in Two Weeks
According to Seoul foreign exchange trading on the 15th, the exchange rate closed at 1484.7 won in weekly trading (as of 3:30 PM), down 8.3 won from the previous trading day. This marked the first time the rate closed in the 1480 range since May 12 (1489.9 won), about two months ago. The exchange rate rose to near 1560 won at the beginning of this month but has since declined rapidly, dropping about 70 won in just two weeks.
During the same period, the dollar index (DXY), which represents the dollar's value against six major currencies, fell 0.24%, while the dollar-yen exchange rate, which has high correlation with the won, declined only 0.15%. Considering this, the won's strength was particularly pronounced in July.
The recent exchange rate decline was influenced by both improved external conditions and increased domestic dollar supply. US consumer prices came in below expectations overnight, easing concerns about Federal Reserve rate hikes and weakening the dollar. The resulting risk appetite recovery led to significant gains in the domestic stock market, with foreign stock purchases expanding to support won strength. Foreigners purchased nearly 3 trillion won in domestic stocks on this day.
From a domestic supply perspective, dollar selling by semiconductor exporters and shipbuilding and heavy industry companies pressured the upper range of the exchange rate. Export proceeds secured from strong semiconductor exports flowed into the foreign exchange market, and shipbuilding and heavy industry companies converted advance payments received from overseas orders into won, increasing dollar supply. Expectations that SK Hynix's American Depositary Receipt (ADR) issuance funds will gradually flow in during the domestic investment process are also interpreted as strengthening dollar selling sentiment.
Bank of Korea Rate Decision Expected on the 16th
Expectations for a base rate hike one day before the monetary policy committee meeting also stimulated won strength sentiment as a factor in the exchange rate decline. Markets view the Bank of Korea as highly likely to raise the base rate by 0.25 percentage points to 2.75% on the 16th. Considering that the US policy rate is currently 3.50-3.75%, the Korea-US base rate gap would narrow to 1.00 percentage point based on the upper range. Expectations that the domestic and foreign interest rate inversion will narrow are interpreted as easing won weakness pressure and supporting the exchange rate decline.
However, since the possibility of a base rate hike has already been largely reflected in the market, the exchange rate trend after the monetary policy committee is expected to react more sensitively to signals about additional rate hike possibilities and future rate trajectory. Moon Jung-hee, KB Kookmin Bank economist, stated that "to fall below 1480 won, which is considered a psychological resistance line, it is necessary to confirm the lower range of the exchange rate until the monetary policy committee meeting."
There are also opinions that while the Bank of Korea's rate hike can be a factor easing won weakness pressure, its power to directly pull down the exchange rate is limited. Lee Jung-hoon, Daishin Securities economist, explained that "expectations that the Bank of Korea's rate hike will act as a factor for won appreciation or easing depreciation pressure are reasonable," but "historically, the dollar's value itself has been a more important variable for the dollar-won exchange rate than the Korea-US interest rate difference, and the direct impact of Korea's rate hike on the exchange rate is not significant."
FAQ
What caused the won-dollar exchange rate to drop to 1484.7 won?
The exchange rate dropped due to US inflation slowdown that weakened the dollar, foreign stock purchases of nearly 3 trillion won in domestic markets, and dollar selling by semiconductor exporters and shipbuilding companies converting export proceeds and advance payments into won.
When did the won-dollar exchange rate last trade in the 1480 range?
The exchange rate last closed in the 1480 range on May 12 when it finished at 1489.9 won, making this the first time in about two months that the rate returned to this level.
What is expected from the Bank of Korea meeting on the 16th?
Markets expect the Bank of Korea to raise the base rate by 0.25 percentage points to 2.75% on the 16th, with the future rate trajectory expected to significantly influence whether the exchange rate stabilizes in the 1400 range.
