The U.S. Federal Reserve’s interest rate cut is also delayed… Middle East risks further increase
Although it is a ‘crisis exchange rate’, the market is less anxious… Volatility may increase
The won/dollar exchange rate is rapidly rising, breaking new highs every day and exceeding the 1,370 won level for the first time in 17 months. This is due to the strengthening of the global dollar as there is a growing possibility that the U.S. Federal Reserve’s (Fed) interest rate cut will be later than originally expected.
Considering that monetary policy differentiation has already begun between major countries such as the United States and Europe, and geopolitical risks in the Middle East are increasing, such as Iran’s retaliatory attack on Israel, the exchange rate rise may continue for some time longer. ◇ Exchange rate highest in 17 months… Dividend remittance issue due to strong US dollar
According to the Seoul foreign exchange market on the 14th, the won-to-dollar exchange rate closed at 1,375.4 won on the 12th, up 22.6 won from the previous week. Based on the closing price, it is the highest level in 17 months since November 10, 2022 (1,377.5 won), and the weekly increase was also the largest since January 19 (25.5 won).
The reason why the exchange rate has risen so quickly recently is basically because the U.S. dollar has shown strength.
As the rate of increase in the U.S. consumer price index (CPI) has slowed, the possibility that the Federal Reserve’s policy interest rate cut will be delayed more than market expectations has increased. According to the U.S. Department of Labor, the U.S. CPI in March rose 3.5% compared to the same month last year, reaching the highest level in six months.
According to FedWatch of the Chicago Mercantile Exchange (CME), immediately after the CPI announcement, the probability of a June interest rate cut expected by interest rate futures investors fell below 20%.
Cho Young-moo, a researcher at LG Management Research Institute, said, “The market has continued to be too far ahead of the curve so far,” and added, “Expectations for a U.S. interest rate cut continued to be delayed through March and May, and now even expectations for June are weakening.” The fact that the U.S. economy is growing faster than expected thanks to robust consumption is also a factor delaying the Federal Reserve’s interest rate cut.
JP Morgan noted that the labor market in the U.S. was very strong, with the number of non-agricultural employed in March far exceeding expectations, and also assessed that the urgency for the Federal Reserve to cut interest rates has decreased.
While expectations of an interest rate cut by the U.S. Federal Reserve have receded, the dollar has once again received strong pressure as the European Central Bank (ECB) hinted at a policy interest rate cut in June.
ECB President Christine Lagarde said at a press conference on the 11th (local time) that “some members are feeling confident about lowering interest rates,” and “we are not going to wait for everything to return to 2%.”
Bank of Korea Governor Lee Chang-yong also mentioned the ECB and the Swiss Central Bank at a press conference right after the Monetary Policy Committee meeting on the 12th, saying, “Since the U.S. has been giving pivot signals since the end of last year, I think (monetary policy) decoupling has already begun.”
Heightened geopolitical risks in the Middle East also cause the dollar to strengthen.
As risk aversion spreads, the value of the dollar, a representative safe asset, also rises.
On the 12th (local time) in the New York foreign exchange market, the dollar index, which represents the value of the dollar against six major currencies, rose above the 106 mark for the first time since November of last year due to news of an imminent Iranian attack.
Iran carried out a retaliatory attack on the Israeli mainland on the 13th (local time) by launching unmanned aerial vehicles (drones) and cruise missiles.
Iran had predicted retaliation by pointing out Israel as the mastermind behind the bombing of its consulate in Syria that occurred on the 1st.
Kim Seok-hwan, a researcher at Mirae Asset Securities, analyzed in a recent report, “The conflict between Israel and Hamas is expanding into a conflict between Iran and Israel,” and “This increases the upside risk of the dollar.”
On this day, the Ministry of Strategy and Finance held an external economic review meeting presided over by Deputy Prime Minister and Minister of Strategy and Finance Choi Sang-mok and examined the related impact.
In addition to the strong global dollar, supply and demand related to dividend remittances this month are also a factor in the rise in the won/dollar exchange rate.
Researcher Kim said, “It is difficult to say that foreign supply and demand conditions have had a direct impact on exchange rate fluctuations, but it is necessary to consider the fact that there are supply and demand issues related to offshore dividend remittances by the end of April.” He added, “The scale is expected to reach approximately $7 billion. “It is expected,” he said.
There is also a view in the market that the upper limit of the won/dollar exchange rate should be maintained at the 1,400 won range. ◇ ‘Country with external net assets’ It is different from the past crisis… Exchange rate volatility may increase
The won/dollar exchange rate exceeded the 1,375 won line in 1997-1998 during the International Monetary Fund (IMF) foreign exchange crisis, in 2008-2009 during the global financial crisis, and in the second half of 2022 when the dollar showed extreme strength due to the Federal Reserve’s intense tightening. all.
The Bank of Korea explains that although the current exchange rate is at the ‘crisis level’ of the past, market instability is not as great as before.
At a press conference on the 12th, Governor Lee said about the reason why there is less market confusion even at the current exchange rate level, saying, “The recent exchange rate rise is basically the effect of the strong dollar, so it is not just our problem, and overseas net assets have also increased.”
In the past, when the exchange rate rose, there was a credit risk due to the burden of repaying external debt, but now that Korea is a country with net external assets, the economic crisis is not caused by exchange rate changes.
According to the Bank of Korea, as of the end of last year, external financial assets (foreign investments) amounted to $2.2871 trillion, an increase of $118.4 billion from the end of the previous year ($2.1687 trillion).
As external financial assets increased more than external financial liabilities, net external financial assets (external financial assets – external financial liabilities) also reached $779.9 billion, an increase of $8.5 billion from the end of the previous year ($771.3 billion).
Governor Lee also evaluated, “Because the overseas investment and assets of pension funds such as the National Pension Service and individual investors referred to as Seohak Ants have increased significantly, a developed country-style foreign exchange market structure has been established.”
In fact, the size of the National Pension Service’s overseas investment was 561.4 trillion won as of the end of January, with overseas investment accounting for 53.6% of the entire financial sector.
The National Pension Service plans to increase the proportion of overseas investments to 60% by 2028.
The amount of investment in overseas securities by individual investors, known as ‘Seohak ants,’ also increased rapidly.
According to the Bank of Korea, as of the end of last year, individuals’ overseas investment balance was $77.1 billion (about 102.7 trillion won), the highest ever.
The share of individuals in overseas securities investment in the entire private sector (individual investors, asset managers, insurance companies, securities companies, banks, etc.) also jumped from 7.3% at the end of 2019 to 20%, about three times at the end of 2023, four years later.
However, there is a possibility that this expansion of investment in overseas securities may increase the volatility of the won/dollar exchange rate.
In a recent report, the Bank of Korea said, “If the upward trend in U.S. stock prices continues due to favorable U.S. economic conditions and expectations of improvement in the AI and semiconductor industries, large-scale overseas stock investments by individuals will resume, and overseas bond investments are expected to rise in bond prices due to expectations of an interest rate cut by the Federal Reserve.” “It is also likely to increase,” he predicted. He continued, “It is expected that domestic foreign exchange supply and demand will improve this year along with the expansion of the current account due to increased exports. However, if overseas retained income of companies, which temporarily received a large inflow last year, decreases, and individual investors’ investment in overseas securities expands at once, foreign exchange will increase. “We need to keep in mind that this could be a burden on supply and demand,” he said.
/yunhap news
2024-04-14 04:53:36
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