“WIN/Dollar Exchange Rate Depends on Changes in US-China Interest Rate Policy” : Donga Weekly

The won/dollar exchange rate continues to rise sharply. The exchange rate won / dollar opened at 1393 won in the Seoul foreign exchange market on September 14, up 19.4 won since the previous day, and once rose to 1394.8 won and closed at 1390.9 won (see graph 1). This is the first time in 13 years and 6 months since March 31, 2009, during the global financial crisis, that the closing price exceeded 1,390 won.

The sharp drop in earnings was mainly due to the higher-than-expected US consumer price index (CPI) for August that was released the day before. The CPI in August rose by 8.3% from the same month a year earlier, and although the pace of increase slowed from the previous month, it was higher than the market consensus (8.0%), raising concerns about prolonged inflation ( see Graph 2). . In addition, the possibility of a ‘higher step’ to raise interest rates by 100bp (1bp = 0.01%p) at the Federal Open Market Committee (FOMC) to be held on September 21-22 (local time) has arisen’ n sudden, triggering a risk aversion sentiment.

How long will the exchange rate rise amid a strong dollar? Dr Chunwook Hong, economist and CEO of Prism Investment Advisory, was asked about the cause of the recent sharp rise in the exchange rate, its impact on the economy and industry, and investment strategies.

US rate hikes, China rate cuts

Why is the recent exchange rate skyrocketing?

“I think there are two main reasons. First of all, we underestimated the US Federal Reserve. The Fed raised expectations like this, whether it will raise interest rates slowly, or whether it will cut rates immediately when inflation is eased At the Jackson Hole Symposium in May, Fed Chairman Jerome Powell rejected the possibility of a rate cut until Jackson Hole next year. Symposium. In fact, reading the full text of the announcement gives the impression that he regrets his comment that ‘inflation is temporary’ this time last year. So, on the contrary, the cut in the interest rate shows the will to do it after inflation has definitely receded.

In addition, China’s sudden cut of the benchmark interest rate to 2.75% on August 15 is also a problem. The US is expected to raise the key interest rate by at least 0.5% per year at the September FOMC, which will raise US interest rates and increase the possibility of capital outflows from China. In this way, if China, Korea’s largest trading partner, weakens the yuan, investors think that the Korean exchange rate will rise, and the merits disappear. Under such circumstances, as non-maturity funds flee to avoid foreign exchange losses, increasing pressure on the exchange rate is inevitable.”

How long will the dollar’s strength last?

“Right now, the best time is for Chinese President Xi Jinping’s third term in office to be confirmed at the 20th National Congress of the Chinese Communist Party (CCP) held in October, and to break away from prescription drugs as cuts in interest rates. . Now, the depreciation of the Chinese yuan is causing foreign capital to flow out, which is not good for China either. In addition, as the real estate market failed and a mortgage boycott broke out in Hunan Province, interest rates were cut to put out an emergency fire, but should be normalized as soon as possible. It would have helped if US CPI had fallen 8% or below in August from the previous month, but that possibility is now gone. In addition, the weakening of the euro is the energy crisis in Europe, so as long as the war in Ukraine ends soon, the strength of the dollar can be calmed. This is because Russian President Vladimir Putin cannot end the war as it is, with nothing but shame.”

There is little chance of a second foreign exchange crisis

On the morning of September 14, the KRW / USD exchange rate is displayed on the electronic board of Hana Bank’s dealing room in Jung-gu, Seoul. [뉴스1]

How will the strengthening of the dollar and the weakening of the won affect the Korean economy and industry as a whole?

“This year is likely to be bad overall. At this time last year, if someone had said that the won/dollar exchange rate would exceed 1,300 won and go up to 1,400 won next year, everyone would have said they were crazy. Therefore, there must be many places where companies were not prepared for the increase in the exchange rate. And most likely, they would go to a bank with a letter of credit and sell a forward exchange (the act of selling to a bank with the foreign currency to be received in the future fixed at a fixed exchange rate to eliminate the risk of exchange) . rate variations). However, since most of the forward exchange contracts are shortened to 1-2 years after the Kiko incident in 2012, it may be difficult until the first half of next year, but it will improve after that. Until then, if the exchange rate is high, the gain will increase.”

If the exchange rate continues to rise, there may be a foreign exchange crisis.

“The foreign exchange crisis comes when we lose control over the exchange rate, and although Japan’s exchange rate has risen more than Korea, no one asks, ‘Is Japan in a foreign exchange crisis?’ The current situation should be seen more like the financial crisis, and it is not a big problem as only the stock price is falling.”

How is it different from the financial crisis of 1998?

“The situation in 1998 was not a ‘foreign exchange crisis’, but a ‘credit crisis’ and a ‘financial crisis’. Domestic financial institutions borrowed short-term money from abroad and gave long-term loans to insolvent companies such as Hanbo. As a result, no matter how much the government supplied dollars to the foreign exchange market, it was depleting. This is because the government insists on a fixed exchange rate system (a system where the government promotes exchange rate stability by setting the exchange rate within a certain range). At that time, I should have switched to a floating exchange rate system (an exchange rate system that allows the exchange rate to be freely determined by supply and demand in the foreign exchange market) This led to the national bankruptcy from borrowing money from the International Monetary Fund (IMF).

If a freely floating exchange rate system is adopted, will there not be a foreign exchange crisis?

“The country will be in trouble because the exchange rate is being adjusted, but there is little chance of it going bankrupt. In the case of Turkiye, the current exchange rate has tripled as a result of the interest rate cut since last year because President Recep Tayyip Erdogan insists that ‘an increase in the interest rate triggers high inflation’.

How far do you expect the won/dollar exchange rate to rise?

“Maybe it will rise above 1,400 won, but I don’t think that period will be long. First of all, as I said when explaining the reason for the sudden increase in the exchange rate in the first place, China will not continue to implement its interest rate cut policy after October. If capital continues to flow out, the country is at risk. In addition, the international price of oil, which once reached $127 per barrel, has now fallen to around $90. Also, in the case of the United States, if import prices fall due to a strong dollar, prices will stabilize and the Fed will adjust the rate of interest rate increases.
And then, the sudden increase in the exchange rate will subside.”

Now is the time to be greedy for investing

Which products are best to invest in at this time of year?

“In times of rising interest rates, bonds are good, but bond-like exchange-traded funds (ETFs) are better than bonds because their underlying transactions are in the billions of units and trading costs are high. Recently, new bond ETFs have been pouring in and corporate bonds are coming out, but I would recommend 10-year KTBs. If you buy government bonds, you pay 4% interest, and MBB, the US mortgage bond, also gives 6% interest. Bonds are products that can earn a return on market capitalization by trading midway while receiving interest. Sure, you can hold it for 10 years and receive interest, but you never know how the investment environment will change, and better investment products might come out. One of the best pieces of advice from world-renowned investment expert Warren Buffett is: “Be fearful when everyone is greedy and be greedy when everyone is scared.” Now is a good time to buy stocks. because it’s cheap You have to take advantage of the current opportunity to increase your returns on investments, and when interest rates are falling, you need to invest at the right time to make a profit.”

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Donga Weekly No. 1356 (p10~12)