"KRW-USD Exchange Rate Hits Highest in Two Years... Expected to Stabilize Next Year" [2025 Investment Strategy]

2025 Investment Strategy Outlook ② Exchange Rates

Jung Yong-taek, Senior Research Fellow at IBK Investment & Securities

"Exchange rate exceeds 1,400 KRW, but expected to stabilize downward as uncertainties are resolved"

"Domestic economy's weak fundamentals suggest sideways movement in mid-1,300 KRW range"

[Editor's Note] As the tumultuous year of 2024, the Year of the Dragon, comes to an end, the financial district of Yeouido is busy predicting the investment strategies for 2025, the Year of the Snake. With domestic economic challenges such as sluggish domestic demand, impeachment proceedings, and high exchange rates, along with uncertainties like the inauguration of the Trump administration's second term, the Ukraine war, and Middle East conflicts, Hankyung.com has asked experts about their investment strategies for the new year across various sectors including stocks, bonds, and commodities.

"The current KRW-USD exchange rate reflects political turmoil and uncertainties regarding the Trump administration's second-term policies. Once these uncertainties are resolved, the exchange rate could drop to the mid-1,300 KRW range next year."

Jung Yong-taek, Senior Research Fellow at IBK Investment & Securities (pictured), shared this outlook in an interview with Hankyung.com on the 18th regarding the exchange rate forecast for the new year. Having accurately predicted the Bank of Korea's unexpected rate cut in November, which drew market attention, Jung diagnosed that the exchange rate excessively reflects domestic political turmoil and financial market anxiety over Trump's re-election. Therefore, he analyzed that once the uncertainties diminish following the inauguration of Trump's second-term administration, the exchange rate will show a stable trend.

"Uncertainties to be resolved once Trump administration's policies are clarified"

Jung Yong-taek, Senior Research Fellow at IBK Investment & Securities./Photo=IBK Investment & Securities

The KRW-USD exchange rate remains in the 1,430 KRW range due to the declaration of martial law and the transition to impeachment proceedings. On the 17th, the KRW-USD exchange rate in the Seoul Foreign Exchange Market (as of 3:30 PM) closed at 1,438 KRW 90 jeon, up 3 KRW 90 jeon from the previous trading day (indicating a depreciation of the KRW). The exchange rate soared to its highest level in over two years since recording 1,439 KRW 70 jeon per dollar on October 24, 2022, during the financial market instability caused by the Legoland incident.

Jung stated, "The exchange rate exceeding 1,400 KRW seems to reflect a lot of uncertainties related to President-elect Donald Trump," and added, "Once the appointments in Trump's second-term administration are completed and related policies are specifically announced, the uncertainties will be resolved, and the exchange rate is expected to enter a stable range." President-elect Donald Trump's inauguration is scheduled for January 20 next year.

The impact of the martial law situation is expected to be short-lived. Jung explained, "Political uncertainties are certainly a negative factor for the Korean economy and financial environment. However, with the impeachment motion passed, short-term uncertainties seem to have been removed," and added, "The likelihood of a sharp rise in the exchange rate has decreased for the time being, and volatility is expected to decrease."

Additionally, with the Credit Default Swap (CDS) premium showing a stable trend, the likelihood of the exchange rate spiking (strong dollar) is considered low. The CDS is a representative indicator that measures a country's external creditworthiness in the international financial market. A higher CDS premium indicates greater credit risk for the issuing country or institution.

Jung noted, "Compared to the shock from news or the fluctuation range of the exchange rate, the CDS premium is showing a stable appearance," and added, "The current CDS premium is significantly lower than during the Legoland incident in September 2022 and is below the level of the first half of this year." Recently, the CDS premium for five-year Foreign Exchange Stabilization Fund Bonds has remained in the 30 bp (1 bp = 0.01% point) range.

"Post-pandemic exchange rate moves within an 80 KRW range around 1,300 KRW"

However, even if uncertainties diminish, it is considered difficult for the exchange rate to drop back to the 1,200 KRW range as before. This is due to the weaker fundamentals of the domestic economy compared to the U.S. The Asian Development Bank (ADB) lowered its forecast for Korea's GDP growth rate this year from 2.5% to 2.2%. Next year's forecast was also adjusted downward from 2.3% to 2%. The Hyundai Research Institute also lowered its forecast for Korea's GDP growth rate next year from 2.2% to 1.7%.

Jung stated, "Before the COVID-19 pandemic, the KRW-USD exchange rate tended to move within a 50 KRW range around 1,100 KRW. However, after the pandemic, the baseline shifted to 1,300 KRW, with a movement range of 80 KRW," and added, "Next year, with the trade environment expected to deteriorate, the exchange rate is expected to continue moving in the 1,300 KRW range."

Considering seasonality, Jung predicted that the exchange rate would peak (strong dollar) in April next year. He explained, "Most domestic companies are December fiscal year-end corporations, so there is a tendency for the KRW to strengthen due to export settlement demand in the fourth quarter. This year, this effect has been diluted due to Trump's re-election," and added, "Conversely, from March to May every year, foreigners who receive dividends domestically tend to remit foreign currency, causing the KRW to weaken."

The gap between the base interest rates of Korea and the U.S. is expected to gradually narrow. This is because the U.S. is expected to lower rates more quickly. Last September, the U.S. central bank indicated through the dot plot that it could lower the base interest rate four times next year. Jung advised paying attention to whether Jerome Powell, Chairman of the Federal Reserve (Fed), will reveal a 'hawkish' stance at the December Federal Open Market Committee (FOMC).

Jung also considered the possibility that President-elect Trump might intervene in the foreign exchange market to lower the dollar's value. He analyzed, "President-elect Trump wants a weak dollar to improve the trade balance but also wants to maintain dollar hegemony," and added, "It cannot be ruled out that he might make a kind of 'Plaza Accord' with China during his term to artificially adjust the exchange rate."

In 1985, the U.S. artificially lowered the dollar's value and raised the value of other currencies through the Plaza Accord and the 2003 Dubai G7 Agreement. This time, it is analyzed that the U.S. and China might reach an agreement to induce a 'weak dollar, strong yuan.' Regarding this, Jung stated, "A strong key currency means global economic tightening," and added, "A weak dollar means easing of global tightening, which could be favorable for the domestic financial market."

Jung, who served as the head of research at KTB Investment & Securities and IBK Investment & Securities, entered the securities industry in 1991 by joining Shinhan Investment Corp. He has been walking the path of a traditional economist for 33 years, having worked at Samsung Asset Management, Eugene Investment & Securities, and KTB Investment & Securities.

Jin Young-ki, Hankyung.com reporter young71@hankyung.com