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Korea Herald
a day ago
- Business
- Korea Herald
Why won likely to stall above 1,300
Widening rate gap with US, trade tensions, weak fundamentals limit further gains The Korean won has been staging a sharp rally, reaching its strongest levels in seven months in June. However, further appreciation beyond the 1,300-per-dollar threshold appears limited as economic headwinds persist. Earlier this year, the won weakening past 1,400 per dollar was considered the 'new normal.' But the local currency has since gained ground, with its average exchange rate in May standing at 1,390.7 won per dollar, dipping below 1,400 for the first time since November. On Thursday, the won closed daytime trading at 1,358.4 per dollar — its strongest level since Oct. 14. The momentum continued in after-hours trading, with the currency quoted at 1,356.5 by the close. The local foreign exchange market was closed Friday in observance of a public holiday. The recent appreciation of the Korean won has been partly fueled by renewed interest from foreign investors in the stock market, who purchased local equities worth 2.2 trillion won ($1.6 billion) following President Lee Jae-myung's election victory on Tuesday. While some market observers expect the won to strengthen further against the greenback, forecasts generally cap gains in the low 1,300 range. For instance, KB Kookmin Bank projects the won could appreciate as much as 1,330 per dollar in June. In contrast, in September, the outlook was more optimistic, with market expectations of the won strengthening toward the 1,200 level — a return to 2022 conditions, when the annual average exchange rate stood at 1,292.2 won per dollar. Expectations for the won to break below 1,300 have since moderated, as structural challenges continue to weigh on the currency, despite the easing of depreciation pressure triggered by political uncertainty. 'While the won may appreciate further in the short term, gains will likely be capped,' said Wi Jae-hyun, an analyst at NH Futures. 'Supplementary budget measures, the resolution of political uncertainty, and a rate cut-driven recovery in domestic demand are expected to provide a floor for the Korean economy. However, uncertainties in exports, stemming from US President Donald Trump's tariff policies, continue to pose a significant headwind to a growth rebound.' Another key factor limiting further appreciation is the widening interest rate gap between Korea and the United States. Following the Bank of Korea's 0.25 percentage point rate cut in May, the key interest rate differential between Korea and the US widened from 1.75 to 2 percentage points. This gap is expected to grow further, as the US Federal Reserve has signaled a continued hawkish stance to curb inflation — in part due to Trump's tariff measures — while the BOK has leaned toward a more dovish approach to support domestic growth. The divergence in monetary policy increases capital outflow pressures from Korea, as investors typically shift toward higher-yielding assets. This outflow puts downward pressure on the won. Experts caution against expecting a major rally in the local currency. 'The current level of the won reflects the country's economic fundamentals. It would not be reasonable to expect a sharp appreciation when the local economy is forecast to remain weak,' an official from the Bank of Korea said. The official added that a weaker won can play a constructive role in an economic slowdown. 'In times of economic downturn, a softer currency can help boost exports and attract foreign investment in undervalued won-denominated assets. While actively depreciating the won to spur growth should be avoided, a weak currency does serve a purpose under such conditions.'
Korea Herald
a day ago
- Business
- Korea Herald
Why Korean won's rally hits wall at 1,300
Widening rate gap with US, trade tensions, weak fundamentals limit further gains The Korean won has been staging a sharp rally, reaching its strongest levels in seven months in June. However, further appreciation beyond the 1,300-per-dollar threshold appears limited as economic headwinds persist. Earlier this year, the won weakening past 1,400 per dollar was considered the 'new normal.' But the local currency has since gained ground, with its average exchange rate in May standing at 1,390.7 won per dollar, dipping below 1,400 for the first time since November. On Thursday, the won closed daytime trading at 1,358.4 per dollar — its strongest level since Oct. 14. The momentum continued in after-hours trading, with the currency quoted at 1,356.5 by the close. The local foreign exchange market was closed Friday in observance of a public holiday. The recent appreciation of the Korean won has been partly fueled by renewed interest from foreign investors in the stock market, who purchased local equities worth 2.2 trillion won ($1.6 billion) following President Lee Jae-myung's election victory on Tuesday. While some market observers expect the won to strengthen further against the greenback, forecasts generally cap gains in the low 1,300 range. For instance, KB Kookmin Bank projects the won could appreciate as much as 1,330 per dollar in June. In contrast, in September, the outlook was more optimistic, with market expectations of the won strengthening toward the 1,200 level — a return to 2022 conditions, when the annual average exchange rate stood at 1,292.2 won per dollar. Expectations for the won to break below 1,300 have since moderated, as structural challenges continue to weigh on the currency, despite the easing of depreciation pressure triggered by political uncertainty. 'While the won may appreciate further in the short term, gains will likely be capped,' said Wi Jae-hyun, an analyst at NH Futures. 'Supplementary budget measures, the resolution of political uncertainty, and a rate cut-driven recovery in domestic demand are expected to provide a floor for the Korean economy. However, uncertainties in exports, stemming from US President Donald Trump's tariff policies, continue to pose a significant headwind to a growth rebound.' Another key factor limiting further appreciation is the widening interest rate gap between Korea and the United States. Following the Bank of Korea's 0.25 percentage point rate cut in May, the key interest rate differential between Korea and the US widened from 1.75 to 2 percentage points. This gap is expected to grow further, as the US Federal Reserve has signaled a continued hawkish stance to curb inflation — in part due to Trump's tariff measures — while the BOK has leaned toward a more dovish approach to support domestic growth. The divergence in monetary policy increases capital outflow pressures from Korea, as investors typically shift toward higher-yielding assets. This outflow puts downward pressure on the won. Experts caution against expecting a major rally in the local currency. 'The current level of the won reflects the country's economic fundamentals. It would not be reasonable to expect a sharp appreciation when the local economy is forecast to remain weak,' an official from the Bank of Korea said. The official added that a weaker won can play a constructive role in an economic slowdown. 'In times of economic downturn, a softer currency can help boost exports and attract foreign investment in undervalued won-denominated assets. While actively depreciating the won to spur growth should be avoided, a weak currency does serve a purpose under such conditions.' silverstar@
