[Today's Foreign Exchange Analysis]FX Authorities, Pension Funds in Focus as Dollar-Won Rises

(Seoul=Yonhap Infomax) Seon Mi Jeong – The dollar-won exchange rate is expected to open higher on the 21st, climbing into the low 1,470 won range.

Despite Nvidia Corp. posting record earnings, a sharp sell-off in technology stocks on the New York Stock Exchange has reignited risk-off sentiment.

South Korea’s benchmark KOSPI index rebounded above the 4,000 mark in the previous session, but attention is now on how much of a correction will occur as the market digests the overnight losses on Wall Street.

It is also worth watching whether foreign investors, who recorded net purchases of 740 billion won ($570 million) the previous day, will shift to net selling.

On Wall Street, the Nasdaq Composite Index fell 2.15%, while the Philadelphia Semiconductor Index, heavily weighted toward AI and semiconductor stocks, plunged 4.77%.

Nvidia’s strong results failed to dispel concerns over an AI bubble, and worries over a broader correction in U.S. asset markets are mounting once again.

Lisa Cook, a member of the U.S. Federal Reserve Board of Governors, drew attention by stating that asset prices are historically high and thus face a heightened risk of a significant decline. In a speech at Georgetown University, she said, “Our assessment is that valuations in several markets—including equities, corporate bonds, leveraged loans, and housing—are elevated relative to historical benchmarks.” She also identified concerns over private credit as a “potential vulnerability to watch.”

Following the sharp drop in U.S. equities, the dollar-won rate closed at 1,472.20 in overnight trading. The offshore rate approached the mid-1,470 won level.

With the dollar remaining strong and the yen weak, upward pressure on the dollar-won exchange rate persists.

U.S. nonfarm payrolls for September, released belatedly due to the federal government shutdown, came in stronger than expected. Payrolls increased by 119,000 from the previous month, more than double the market consensus of 50,000. However, figures for the prior two months were revised down by 33,000.

Markets focused more on the unemployment rate, which rose 0.1 percentage point to 4.4%, the highest since October 2021 (4.5%). The consensus had been for the rate to remain at 4.3%.

With the uptick in unemployment, the probability of a rate cut at the December Federal Open Market Committee (FOMC) meeting rose slightly to 39.5%, up from 30.1% the previous day. While this news put mild downward pressure on the dollar, risk aversion in tech stocks continued to support dollar strength.

Amid growing expectations that the Japanese government will announce a stimulus package exceeding 20 trillion yen ($132 billion), the dollar-yen rate climbed as high as 157.9 overnight. Given Japan’s repeated warnings over currency weakness, intervention by Japanese authorities could occur at any time.

Federal Reserve officials continue to strike a cautious tone. The minutes from the October FOMC meeting showed that more policymakers favored a cautious approach to further rate cuts. Michael Barr, Vice Chair for Supervision at the Fed, noted that inflation remains around 3% and suggested monetary policy should remain prudent. Austan Goolsbee, President of the Federal Reserve Bank of Chicago and formerly considered dovish, reiterated that inflation appears somewhat stagnant and that rate cuts should be approached carefully.

The dollar index, which has surpassed the 100 mark, is unlikely to decline unless markets gain confidence in a December rate cut, which currently appears uncertain.

Markets are also watching for the possible announcement of Jerome Powell’s successor as Fed Chair before year-end. Kevin Hassett, a member of the White House National Economic Council and a candidate for the position, has stated he would accept the nomination and argued that rates should be cut next month.

The 1,470 won level for the dollar-won exchange rate is a zone where South Korean authorities become highly vigilant. Market participants are closely monitoring official moves, and exporters—who had been reluctant to sell dollars—may reconsider hedging at these levels. At the 1,480 won range, the National Pension Service could also engage in strategic hedging. Given that authorities have indicated discussions with pension funds on supply-demand measures, there is a strong possibility of increased tactical hedging.

However, the shockwaves from the U.S. market sell-off are expected to be significant. Not only could this weigh on the domestic stock market, but it may also prompt Korean retail investors to increase overseas investments, exerting additional downward pressure on the won.

In the New York non-deliverable forward (NDF) market, one-month dollar-won contracts were quoted at 1,472.10 won (mid) overnight. Taking into account the recent one-month swap point of -2.20 won, this represents a 6.40 won increase from the previous Seoul spot market close of 1,467.90 won.

(Economics Market Team, Seon Mi Jeong)

smjeong@yna.co.kr

(End)