Won may weaken further as Trump's plans rattle market

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Won may weaken further as Trump's plans rattle market

Published: 07 Nov. 2024, 18:42

SHIN HA-NEE
shin.hanee@joongang.co.kr

Audio report: written by reporters, read by AI

An electronic screen shows the Kospi and the won-dollar exchange rate at Hana Bank's dealing room in central Seoul on Thursday. The Kospi inched up by 1.12 points, or 0.04 percent, to close at 2,564.63 points, while the won-dollar exchange rate closed at 1,396.60 won as of 3:30 p.m., up 0.4 won from the previous session. [NEWS1]

Korea faces mounting uncertainties as the local currency is expected to further weaken against the dollar amid a jittery market, with the resounding victory of Donald Trump, as well as the Republican Party, sending ripples through the country’s export-driven economy.

The won-dollar exchange rate opened at 1,401.1 won on Thursday and soared as high as 1,404.5 won early in the day before closing at 1,396.6 won as of 3:30 p.m., up 0.4 won from a day earlier.

In the previous session, the exchange rate reached 1,404.2 won during overnight trading and closed at 1,399.3 won at 2 a.m., as Trump’s victory in the U.S. presidential election prompted investors to flock to dollars.

This marked the weakest point since Nov. 7, 2022, when the exchange rate soared to 1,413.5 won per dollar mid-trading, driven by post-pandemic inflation and the subsequent monetary tightening in the United States.

The won-dollar rate has historically only rarely breached the 1,400 mark, considered a threshold that may warrant government intervention. Except for briefly touching the mark on April 16, the exchange rate has surpassed the threshold only during three major financial crises so far: the 1997 Asian financial crisis, the 2008 global financial crisis and the 2022 post-pandemic monetary tightening.

However, it may no longer be a rarity anymore, as the Trump camp’s policy proposals including higher tariffs and immigration restrictions are expected to push up U.S. prices, as well as the dollar’s value.

“As the dollar is expected to remain strong for a while, the upward pressure on the won-dollar exchange rate has grown, raising the possibility of the rate landing in the 1,400 won range as well,” said Park Sang-hyeon, a chief economist at iM Securities.

“Coupled with growing concerns over a potential slowdown in Korea's economic growth, the won’s depreciation may further drive foreign capital, as well as retail investors, away from the domestic market,” said Park.

Jeong Yong-taek, an economist at IBK Investment & Securities, expected that Trump’s victory would accelerate the ongoing upward shift of the won-dollar range of movement from a previous center of 1,100 won, plus or minus 50 won, during the pre-pandemic era to a new center of 1,300 won, with a general fluctuation within 80 won, in the longer run.

“Trump’s policy proposals, marked by higher tariffs and lower taxes, would drive up U.S. Treasury yields and strengthen the dollar, which makes the won-dollar rate exposed to upward pressure,” said Jeong.

However, the economist noted that the market already priced in the risk factors in advance, suggesting that “the won-dollar rate may peak at the current level — which is around the 1,400 mark — and gradually come down to around 1,350 won by the end of this year.”

The weak local currency may delay interest rate cuts for the Bank of Korea (BOK), as a rate reduction may further drive up the dollar's value.

“The won-dollar rate is much higher than we initially wished for, and the scope of the increase was also very steep,” said BOK Gov. Rhee Chang-yong back in October, adding that the foreign exchange rate “will be taken into account” during the upcoming rate-setting meeting.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]