US Inflation Eases, Strong Dollar Calms... Exchange Rate Re-enters 1,440 Won Range

The sharp rise in the won-dollar exchange rate that followed the US Federal Reserve's surprise interest rate cut is expected to ease. The US November Personal Consumption Expenditures (PCE) price index came in lower than market expectations, alleviating the inflationary pressures that had been fueling the strong dollar.

On the 23rd, the won-dollar exchange rate in the Seoul foreign exchange market started trading at 1,446 won, down 5.4 won from the previous trading day. The one-month won-dollar non-deliverable forward (NDF) traded in New York overnight was finally quoted at 1,443.0 won.

The Dollar Index, which measures the value of the dollar against six major currencies, was recorded at 107.7 at the opening of the foreign exchange market.

The key factor driving the decline in the exchange rate is the US November PCE price index. The PCE, compiled by the US Department of Commerce, is a major inflation indicator that the Federal Reserve refers to when deciding interest rates. The November index rose 0.1% from the previous month and 2.4% year-on-year. These figures are 0.1 percentage points lower than market expectations (0.2% increase from the previous month, 2.5% increase year-on-year).

The core PCE, excluding volatile food and energy, rose 0.1% from the previous month and 2.8% year-on-year. This is also 0.1 percentage points below market expectations.

The lower-than-expected rise in the price index is interpreted as a positive signal for easing inflation. This is seen as a precursor to the Federal Reserve's dovish stance, and market experts expect that the strong dollar phenomenon that swept the global financial market in late December will also ease slightly.

Hana Bank stated, "The PCE price index has alleviated market concerns, and some Federal Reserve members' forecasts that the inflation slowdown will continue have added strength," adding, "From the domestic market supply and demand perspective, there is a selling advantage due to the year-end export companies' negotiation volumes, which will put downward pressure on the exchange rate."

Hana Bank suggested an expected band for the won-dollar exchange rate of 1,440 to 1,449 won for the day.

However, the prevailing assessment is that it is still difficult to expect a strong dollar relaxation to the extent that the market's direction will be reversed.

KB Kookmin Bank stated, "The November PCE price result is insufficient to change the Federal Reserve's interest rate path expectations," and "To expect a shift in expectations to the extent that the FOMC will increase the number of interest rate cuts next year, it is necessary to confirm the December employment and consumer price index, which will be announced in early to mid-January next year."

KB Kookmin Bank suggested an exchange rate expected band of 1,440 to 1,450 won for the day.

Reporter Jeon Beom-jin forward@wowtv.co.kr