South Korean Won Takes a Dive: Implications for the US
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The South Korean won (KRW) has plummeted to its weakest point against the US dollar (USD) since the 2009 global financial crisis, exceeding 1,460 won per dollar. This represents a sharp increase from 1,310 won per dollar just three months prior, marking a decline of over 10% in the won’s value. This dramatic shift has significant implications for both international markets and American investors.
Several factors contributed to this sudden downturn. The election of Donald Trump as US President and the subsequent “Trump Trade” are widely considered major catalysts. Moreover, the US Federal Reserve’s (Fed) decision to reduce its projected interest rate cuts for the following year from four to two, announced at the Federal Open Market Committee meeting, added to the downward pressure on the won. Internal Korean factors also played a role, including an unexpected interest rate cut by the Bank of Korea, the imposition of martial law (the first in 45 years), and the impeachment of the South Korean president.
Having breached the 1,450 won per dollar mark – a significant resistance level – the possibility of the exchange rate reaching 1,500 won cannot be ruled out. However, many analysts believe the won’s current value is excessively low. The average won-dollar exchange rate from 2021 to the present stands at 1,276 won, approximately 180 won (14.4%) lower than the current rate.
The narrowing interest rate differential between the US and South Korea, shrinking from 2.0 percentage points to 1.5 percentage points in the latter half of the year, also contributed to the won’s decline. Despite South Korea’s projected current account surplus of $80 billion to $90 billion this year, the won’s undervaluation against the dollar remains a concern.
Looking ahead, experts predict a volatile exchange rate for the coming year. While the past three years have seen a pattern of fluctuating highs and lows,the current situation is considered unsustainable in the long term.the expectation is for the won-dollar exchange rate to hover around 1,400 won in the first half of next year, before potentially falling to the mid-to-late 1,300 won range in the second half.
This prediction considers the projected economic growth and inflation rates of both Korea and the US. The anticipated global economic slowdown is expected to impact the US economy, potentially lessening its current dominance.
“Considering the real economic growth rates and inflation rates of Korea and the U.S. next year, it is indeed expected that it will be difficult for the U.S. economy to dominate on its own like it does now,” notes Jeonghee Moon, Chief Economist at Kookmin Bank.
South Korean Won Takes a Dive: Implications for the US adn Global Markets
The South Korean won (KRW) has recently experienced a steep decline against the US dollar (USD), reaching its lowest point since the 2009 global financial crisis. This dramatic shift has sent ripples through international markets, raising concerns about the impact on both the US and the broader global economy. World-Today-News.com sat down with renowned economist Dr. Lee Min-Jung to gain insights into the factors driving this currency fluctuation and its potential ramifications.
Factors Behind the Won’s Decline
Senior Editor: Dr. Lee, the South Korean won has plummeted considerably against the US dollar. What are the key factors driving this sudden downturn?
Dr. Lee Min-Jung: Several factors are at play here. The election of Donald Trump and subsequent “Trump Trade” policies, characterized by protectionist measures, initially rattled global markets and strengthened the US dollar.The Federal Reserve’s decision to scale back its projected interest rate cuts further fueled the dollar’s rise. These external pressures were exacerbated by internal Korean challenges such as an unexpected interest rate cut by the Bank of Korea, the imposition of martial law, and political upheaval stemming from the impeachment of the South korean president.
The Role of Interest Rate Differentials
Senior Editor: the article mentions shrinking interest rate differentials between the US and South Korea. Could you elaborate on how this impacts the exchange rate?
Dr. Lee min-Jung: When interest rates in the US are higher than those in South Korea, investors are incentivized to move their capital to the US in search of higher returns. This increased demand for US dollars pushes up the dollar’s value relative to the won. The narrowing differential reduces this incentive, but it’s not the sole determining factor in the equation.
Future Outlook for the Won-Dollar exchange Rate
Senior Editor: Looking ahead, what are your predictions for the future trajectory of the won-dollar exchange rate?
Dr. Lee Min-Jung: While short-term volatility is likely,I believe the current undervaluation of the won is unsustainable in the long run. We may see it settle around 1,400 won per dollar in the first half of next year, perhaps dropping to the mid-to-late 1,300 range in the latter half. This projection factors in anticipated economic growth and inflation rates for both Korea and the US, as well as the potential impact of a global economic slowdown on US economic dominance.
Global Economic Implications
Senior Editor: What are the broader global economic implications of this weakening won?
Dr. Lee Min-Jung: A weaker won makes South Korean exports more competitive internationally,potentially benefiting industries like electronics and automobiles. Though, it also makes imports more expensive, leading to higher inflation. The broader impact depends on how long this trend persists and its ripple effects on other currencies and global trade patterns.
