Powell's 'December Cold Water'... Exchange Rate Breaks Through 1450 Won

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Fed cuts base rate by 0.25%P

Signals rate cut moderation next year

Won-Dollar exchange rate highest since financial crisis

The Federal Reserve (Fed) of the United States hinted at significantly slowing the pace of rate cuts next year, causing a sharp decline in the value of the Korean won and the domestic stock market. The exchange rate exceeded 1450 won per dollar, reaching the highest level since the global financial crisis, and the KOSPI index fell by nearly 2%. Concerns are growing that it may become difficult for the economy to rebound as the global economic environment worsens amid ongoing domestic political instability due to the impeachment situation.

On the 19th, the won-dollar exchange rate in the Seoul foreign exchange market (as of 3:30 PM) closed at 1451.90 won, up 16.40 won from the previous day (the value of the won fell). It is the first time in 15 years and 9 months since March 13, 2009 (1483.50 won) that the exchange rate closed above 1450 won. At that time, the exchange rate was coming down from above 1500 won due to the aftermath of the global financial crisis. The KOSPI index recorded 2,435.93, down 48.50 points (1.95%) from the previous session. The KOSDAQ index fell by 1.89%.

The sharp rise in the exchange rate and the steep decline in the stock market on this day are analyzed to be due to the Fed's significant revision of the dot plot at the regular meeting of the Federal Open Market Committee (FOMC) on the 18th (local time). The Fed cut the base rate by 0.25 percentage points to 4.25-4.50% per annum but raised the year-end rate forecast by 0.5 percentage points from 3.4% to 3.9%. Jerome Powell, the Fed Chairman, said at a press conference after the FOMC, "Through the expressions 'range' and 'timing' of rate adjustments in today's monetary policy direction statement, we signaled that it is appropriate to slow the pace of further rate adjustments or that we are near that point." The market is evaluating this as 'much more hawkish (preference for monetary tightening) than expected.'

As the exchange rate surged, the possibility of a preemptive rate cut by the Bank of Korea, considered a means of economic recovery, has also significantly retreated. There are concerns that if only Korea speeds up while the U.S. delays cuts, the exchange rate could approach 1500 won.

Yoon Yeosam, a researcher at Meritz Securities, said, "(The FOMC decision) could significantly constrain the easing of domestic monetary policy."

"Exchange rate could reach 1500 won early next year"... Financial crisis-level shock, foreign exchange authorities in 'all-out war'

"Will rise more around Trump's inauguration"... Government actively defends exchange rate

Foreign exchange market participants have recently regarded 1450 won per dollar as a kind of psychological resistance line. This is because the foreign exchange authorities have declared that they will actively respond to rapid exchange rate fluctuations as political uncertainty eases amid the impeachment situation.

The situation changed rapidly when the results of the Fed's FOMC came out in the early morning of the 19th. The won-dollar exchange rate soared above 1450 won as soon as the market opened, with the psychological resistance line being pushed to '1500 won'. As speculation arises that the exchange rate could rise further in conjunction with the inauguration of the second Trump administration in early next year, the foreign exchange authorities are on high alert.

○"Psychological resistance line threatened at 1500 won"

There was tension in the foreign exchange market even before the market opened on this day. After the FOMC results were announced, the won-dollar exchange rate had already exceeded 1450 won in the New York Non-Deliverable Forward (NDF) market overnight. At 9 AM, the exchange rate started at 1453 won, up 17.50 won from the previous day's weekly closing price. Dollar selling, presumed to be intervention by the authorities, emerged from the beginning of the session, bringing the exchange rate down to around 1449 won. However, as won selling emerged at the end of the session, the weekly transaction closed at 1451.90 won. The closing price on this day is the highest level in 15 years and 9 months since March 13, 2009, when it was 1483.50 won during the global financial crisis.

The exchange rate movement on this day is analyzed to be due to the Fed's monetary policy. Although the Fed cut the base rate as expected by the market, it announced that it would adjust the pace of future rate cuts, triggering a strong dollar.

Experts believe that this weakness in the value of the won could continue for the time being. This is because, while the pace of U.S. rate cuts is slowing, domestic conditions are creating a situation where the base rate needs to be lowered due to sluggish domestic demand, slowing exports, and added political uncertainty.

Baek Seok-hyun, an economist at Shinhan Bank, predicted, "The exchange rate could rise to around 1460 won by the 20th," and "even if the dollar value slightly decreases by the end of the year, the upward trend is expected to resume early next year." Park Hyung-jung, head of investment strategy at Woori Bank, also saw a high possibility of exceeding the 1500 won level around January next year, when President Donald Trump is scheduled to take office.

○Successive foreign exchange supply and demand stabilization measures

The Ministry of Strategy and Finance, the Bank of Korea, and the Financial Services Commission, among other foreign exchange and financial authorities, have been pouring out market stabilization measures. Choi Sang-mok, Deputy Prime Minister and Minister of Strategy and Finance, said at the macroeconomic and financial meeting on this day, "Excessive one-sidedness in one direction can lead to a large counter-reaction in the opposite direction in the future," and "it is a time when calm responses from market participants are needed." Deputy Prime Minister Choi warned, "We will boldly and swiftly implement additional market stabilization measures against excessive volatility."

Successive foreign exchange supply and demand stabilization measures were also announced. The Ministry of Strategy and Finance and the Bank of Korea announced that they would extend the foreign exchange swap contract period with the National Pension Service by one year until the end of next year and increase the limit from 50 billion dollars to 65 billion dollars. This measure allows the National Pension Service to utilize the foreign exchange reserves held by the government when procuring dollars for overseas asset purchases, which has the effect of reducing upward pressure on the exchange rate.

The National Pension Service decided to maintain the strategic foreign exchange hedge ratio at 10% until the end of next year. This is a measure that was raised from 0%, and the deadline, which was until the end of this year, has been extended by one year. When the National Pension Service increases the foreign exchange hedge ratio, it results in an increase in dollar supply in the market through dollar forward selling.

The financial authorities requested cooperation from banks. Kim Byung-hwan, Chairman of the Financial Services Commission, requested at the corporate finance situation inspection meeting on this day that the five major commercial banks (Kookmin, Shinhan, Hana, Woori, Nonghyup) and policy financial institutions (Industrial, Export-Import, and Corporate Banks) flexibly adjust the maturity of corporate foreign currency settlements and loans.

In addition, the government announced plans to improve foreign exchange supply and demand, activate foreign exchange transactions during extended hours, and improve the trading infrastructure related to the World Government Bond Index (WGBI) to stabilize the foreign exchange market and secure foreign currency liquidity. The Ministry of Strategy and Finance, the competent ministry, is strongly considering expanding the forward exchange position limit.

Reporter Kang Jin-kyu/New York Correspondent Park Shin-young/Kang Hyun-woo/Lee Kwang-sik josep@hankyung.com