The won-dollar exchange rate, which soared to the 1560s, has dropped to the 1450s, drawing attention to its future trajectory. Despite factors contributing to the won's weakness, such as rising international oil prices, surging U.S. Treasury yields, and a strong dollar, the value of the won has strengthened due to improved dollar supply conditions.
On July 27, the weekly closing exchange rate for the won against the U.S. dollar in the Seoul foreign exchange market was 1468.5 won, up 1.9 won from the previous day. The exchange rate, which started lower, rose due to dollar buying pressure and foreign selling of stocks. Recently, the exchange rate has fluctuated around the 1450 mark after hitting its lowest level in two and a half months on July 24.
Geopolitical instability in the Middle East and rising international oil prices pose challenges for South Korea's economy, which is heavily reliant on oil imports, increasing pressure on the won. Recently, military tensions between the U.S. and Iran have escalated, leading to a sharp rise in the 10-year U.S. Treasury yield and a strengthening dollar.
The benchmark 10-year U.S. Treasury yield reached 4.71% on July 24, surpassing 4.7% for the first time in a year and a half. Although international oil prices briefly fell to pre-war levels following news of a peace agreement between the U.S. and Iran, they have since shown volatility, rising above $90 amid renewed conflict.
While military confrontations between the U.S. and Iran have eased over the weekend, uncertainty remains. There are concerns that both sides could resume airstrikes, and security threats are increasing not only in the Strait of Hormuz but also in the Red Sea, raising fears of disruptions to energy supply chains. Despite this, the won continues to show strength against major currencies.
Market analysts attribute the won's strength more to improvements in domestic foreign exchange supply rather than a weakness in the dollar itself. Kiwoom Securities recently noted that the decline in the won-dollar exchange rate is driven by increased demand for currency exchange from companies, a stabilization in foreign stock selling, and a narrowing interest rate gap between domestic and foreign markets.
In particular, the easing of foreign capital outflows from the domestic stock market, improved growth forecasts due to strong semiconductor exports, and the Bank of Korea's interest rate hike have contributed to the narrowing of the interest rate differential between South Korea and the U.S., supporting the won's strength. Additionally, expectations for currency exchange demand related to SK Hynix ADRs and increased forward sales by heavy industry companies have also boosted dollar supply in the foreign exchange market.
However, the upcoming Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve is a key variable that could determine the direction of the exchange rate. If signals indicating the possibility of a rate hike later this year emerge from the FOMC meeting scheduled for July 28-29 (local time), the dollar could strengthen again, leading to a rebound in the won-dollar exchange rate.
Conversely, if the Fed signals a reduced likelihood of further tightening, the trend of a stronger won may continue. Park Sang-hyun, a researcher at iM Securities, stated, "The amplification of Middle East risks and heightened expectations for a rate hike after the FOMC meeting could be factors for a rebound in the exchange rate."
According to the CME FedWatch Tool, the futures market reflects a 74.9% probability that the Fed will raise the benchmark interest rate by more than 0.25 percentage points in September.
There are also assessments that the long-term trend of a stronger won remains to be seen. This is due to the high dependence on the U.S. artificial intelligence investment cycle and the structural demand for dollars resulting from domestic investors expanding overseas investments.
Kim Yu-mi, a researcher at Kiwoom Securities, noted, "For the won-dollar exchange rate to decline further, growth momentum needs to spread beyond the semiconductor sector, and the expected returns on domestic assets must maintain an advantage over overseas assets."
* This article has been translated by AI.
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