What’s next for USD/KRW after the pair’s rate soared to 13-year highs on a record South Korea trade deficit, slowing global economy, rising inflation and a strong US dollar? Photo: An147yus / Shutterstock
Strength in the value of the US dollar (USD) has lifted it to its highest level against the South Korean won (KRW) since March 2009. The won has dropped by 13% against the dollar year-to-date. The sell-off is partially driven by a record South Korean trade deficit on the soaring cost of energy imports and slowing global demand for semiconductors, of which the country is the world’s largest producer.
In this article, we look at the recent performance of the USD/KRW foreign exchange (forex, FX) pair and some of the latest analyst forecasts.
Will Korean Won Continue To Gain Ground Against Us Dollar?
In forex trading, the USD/KRW pair refers to how many South Korean won – the quote currency – are needed to buy one US dollar – the base currency.
As the global reserve currency, the value of the US dollar is driven by trader sentiment on the performance of the global economy as much as by the domestic US economy. Investors view the greenback, as it is also commonly known, as a safe haven asset to protect their wealth during times of economic volatility and geopolitical instability. In 2022, the dollar’s safe haven status has lifted the US Dollar Index (DXY) – which measures the value of the dollar against a basket of currencies – has skyrocketed to 20-year highs.
The US Federal Reserve’s (Fed) decision to aggressively raise interest rates at the fastest pace in decades in an attempt to bring down soaring inflation has been a key driver for the dollar this year. Higher interest rates make a country a more attractive investment destination, increasing demand for its currency.
Korean Won Rises On Expectations Of U.s. Rate Freeze, Better Chip Biz
The South Korean won is the official currency of the Republic of Korea. After the Second World War and the division of North and South Korea, the won was valued at 15 to the US dollar. The currency was subsequently devalued by the Korean War and replaced by the hwan, before the won was reintroduced by the Bank of Korea (BoK), in June 1962 at a rate of 125 to the dollar. The won became the only legal South Korean currency in March 1975. The won was free floated on the forex market shortly before the Asian financial crisis in 1997-1998, which resulted in its devaluation to almost half its value.
On currency markets, exchange rates are typically driven by a country’s gross domestic product (GDP) growth, employment rates, trade balance and foreign currency reserves, as well as monetary policy such as interest rates.
The South Korean economy is facing headwinds as a major energy importer as well as an exporter of goods such as semiconductors, industrial machinery and vehicles at a time when the global economy is increasingly showing signs of an approaching recession.
Dollar's Weakness Pushes Won To 30 Month High
The USD/KRW pair has been trending higher since November 2020, when it was trading around 1, 083, and started 2022 around 1, 195. The pair advanced above 1, 200 in March as the dollar strengthened in response to the Russian invasion of Ukraine and the Fed starting to raise interest rates.
While USD/KRW dipped from 1, 290 on 12 May to 1, 236 on 30 May, the pair quickly resumed its upward trend, rising above the 1, 300 level in July. The dollar’s gains have accelerated since mid-August, with the pair trading up from 1, 315 on 17 August to 1, 375 on 6 September.
Economic data for August showed that South Korea’s export growth slowed, with the trade deficit widening to a record high. The S&P Global South Korean manufacturing purchasing managers’ index (PMI) fell from 49.8 in July to 47.6 in August, moving further into contraction territory below 50. Manufacturers saw the fastest decline in production and new orders since June 2020, and expressed concern over the economic outlook at home and abroad.
Exchange Rates Current Rate: 1 South Korean Won = U.s. Dollars.
Korea announced a $9.47bn trade deficit for August, compared with $4.81bn in July and a near $10bn trade surplus in September 2020. Preliminary second-quarter GDP data from the Bank of Korea showed that the economy grew by 2.9% year on year and 0.7% from the first quarter.
The Bank of Korea revised down its GDP growth forecast for 2022 to 2.6%, from its previous forecast of 2.7% in May, and its forecast for 2023 to 2.1%, from 2.4%.
The trade deficit, PMI and industrial production data prompted analysts at Dutch bank ING to downgrade their South Korean GDP forecasts to 2.5%, from 2.6% previously for 2022, and to 1.4%, from 1.6%, for 2023. The analysts wrote on 1 September:
Korean Won Likely To Further Ascend On Eased Trade Tensions, Hope Of Us Rate Cut
“We think that the third quarter will post a small gain mainly led by private consumption and construction growth, but negative growth is likely in the fourth quarter when the rise in debt service costs weigh on household spending and trade conditions worsen as a result of weakening global demand.”
The BoK has raised interest rates by 125 basis points, but that has not been enough to support the won, given economic outlook and the strength of the US dollar.
South Korea’s headline inflation rate eased down to 5.7% year on year in August from 6.3% in July, below consensus estimates of 6.1%. ING predicts that inflation has peaked but could remain above 5% for the rest of the year. Super Typhoon Hinnamnor, which hit the country on 6 September, could drive up short-term food inflation. The BoK has indicated that it will continue raising interest rates while inflation remains above 5% and growth does not deteriorate meaningfully. ING expects the BoK to end its hiking cycle at 3% in November, according to Min Joo Kang, the bank’s Senior Economist for South Korea and Japan.
Korean Won Performs Worst Among Major Currencies Against Us Dollar
How could the won trade for the rest of the year and over the long term? What is the latest US dollar to Korean won forecast outlook from forex analysts?
Analysts at Malaysia-based Maybank anticipate the USD/KRW pair rising further: “We expect KRW to remain under pressure in the near-term amid global growth concerns, tighter financial conditions (as highlighted by central banker comments in Jackson Hole) and ongoing Covid wave in Korea. Slowing global chip demand growth is also a concern, given KRW’s sensitivity to domestic equity performance. Potential tensions with China, North Korea are additional risk triggers to consider. But signs of moderation on Covid infection pace, still-hawkish BoK, slowing up-moves in UST yields, softer oil prices in 3Q (vs. 1H), potential peaking in hawkish Fed narrative post Jackson Hole adjustments etc., could imply some chance for USDKRW to head lower into end-year and 2023.”
The Maybank analysts have raised their USD/KRW forecast for 2022 from 1, 280 to 1, 340 for the end of the third quarter and from 1, 260 to 1, 320 for the fourth quarter. For 2023, they adjusted their USD/KRW forecast from 1, 240 to 1, 300 for the first quarter of 2023 and from 1, 230 to 1, 270 for the second quarter of 2023.
Solved 4. Consider The Exchange Rates Below For The Us
But Maybank’s technical analysis at the end of August showed that “a potential turn lower in USD/KRW should not be ruled out. We note that past periods of sharp USDKRW run-up in 2014-16, 2018-20 saw KRW depreciate by around 22% vs. USD on average. The current run-up since late-2020 is similarly seeing ~24% depreciation in KRW (vs. USD). We opine that the current sell-off in KRW could potentially be near a turning point. Taking other technical signals in consideration, the bearish divergence in MACD may add to further signs that pace of decline in KRW may moderate and a USDKRW interim top may be near.”
The analysis showed the relative strength index (RSI) dipping lower from near-overbought conditions, as well as the bearish divergence on the moving average convergence divergence (MACD). There was support at the July high of 1, 327, the 21-day moving average at 1, 321 and the 100-day moving average at 1, 286, while there was resistance at 1, 352 and 1, 380.
“We expect that the trade deficit will put more pressure on the KRW. Although we believe that the recent KRW weakness is mostly driven by the global dollar strength, the trade deficit will not be supportive for the KRW in near future. Consequently, we think the KRW will depreciate further to 1, 380 from the current level of 1, 350.”
Dollar Or South Korean Won, Usd/krw Balance Concept Isolated On White Background Stock Photo
For the longer term, the bank’s forecast shows the pair turning lower to 1, 240 by the end of 2023 and 1, 200 by the end of 2024, indicating a bearish outlook for the USD/KRW forecast in 2025.
However, the USD/KRW forecast from analysts at Singaporean bank UOB indicates that the pair could reach the 1, 400 level in the first half of 2023, up from 1, 360 at the end of the third quarter. The USD/KRW forecast from
Put the pair at 1, 379.25 by the end of the current quarter and 1, 435.06 in 12 months’ time, based on global macro models and analysts’ expectations.
S.korean Currency Tumbles On Expectations For U.s. Fed's Further Rate Hike
Predicted at the time of writing that the USD/KRW pair could trade at 1, 428 by the end of 2025, up
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