In the Wake of the US FOMC Shock, Exchange Rates Hit Highest Since Financial Crisis... "Watch BOJ's Rate Decision"

Won-Dollar Exchange Rate Surpasses 1,450 Won... First Time in 15 Years and 9 Months

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The won-dollar exchange rate is under upward pressure due to the strong dollar, driven by the delayed outlook for a US base rate cut. Early on the 19th, it broke through 1,450 won, marking the highest level since the global financial crisis in March 2009.

In the Seoul foreign exchange market, the won-dollar exchange rate was trading at 1,450.1 won as of 10:44 AM, up 14.6 won from the previous day's weekly closing price (3:30 PM). The rate started at 1,453 won, up 17.5 won from the previous day, and is currently hovering around the 1,450 level.

Overnight, the US Federal Reserve (Fed) held a Federal Open Market Committee (FOMC) meeting and decided to lower the base rate by 0.25 percentage points (P). The Fed's rate cut met market expectations, but the hawkish (preference for monetary tightening) forecast of future rate cut adjustments led to a strong dollar and a decline in the New York stock market. According to the dot plot (a chart showing FOMC members' projections for future interest rate levels), the members forecast two additional cuts (0.5 percentage points) next year. This is much smaller than the previous September forecast (four cuts, 1.0 percentage points).

Lee Han-jae, a PB team leader at Shinhan Bank's Shinhan Family Office Banpo Center, pointed out, "The Fed cut the base rate by 0.25 percentage points, but it was evaluated as a 'hawkish cut' as it raised next year's rate forecast." He continued, "The Bank of Korea recently lowered its economic growth forecast for next year from 2.2% to 1.9%. Given the potential weakening of the won's fundamentals due to political uncertainty and slowing exports, the BOK is likely to carefully adjust the pace of next year's base rate cuts."

Moon Jeong-hee, chief economist at KB Kookmin Bank, said, "Considering the delay in the US rate cut path and the strong dollar, the won-dollar exchange rate should be viewed at the upper and lower bounds of 1,450 won."

Economist Moon focused on the Bank of Japan's (BOJ) monetary policy committee rate decision, which was announced around noon. He said, "While we need to watch, the consensus is currently for a freeze," adding, "If the BOJ raises rates unexpectedly, the won is also expected to strengthen, potentially dropping to around 1,440 won during the day."

Meanwhile, in response to the rapid rise in exchange rates, the authorities issued a series of messages as part of measures to mitigate volatility.

Choi Sang-mok, Deputy Prime Minister and Minister of Strategy and Finance, held a macroeconomic and financial meeting (F4 meeting) in the morning and said, "We will continue to operate a 24-hour financial and foreign exchange market monitoring system and will boldly and swiftly implement additional market stabilization measures in the event of excessive volatility."

Yoo Sang-dae, Deputy Governor of the Bank of Korea, also stated at a morning market situation check meeting, "If external uncertainties combine with domestic political situations to excessively expand financial and foreign exchange market volatility, we will promptly implement market stabilization measures."

As a detailed measure, financial authorities decided to postpone the introduction of bank stress buffer capital from the end of this year to the second half of next year.

The core of the stress buffer capital regulation is to accumulate additional capital up to 2.5 percentage points, in addition to the existing minimum capital regulation ratio, according to the level of common equity capital ratio decline based on bank-specific stress tests (crisis situation analysis). The authorities plan to review the timing and method of introduction in the first half of next year and introduce it in stages.

Shin Min-kyung, Hankyung.com reporter radio@hankyung.com