[Shin Yun-woo's FX Analysis] A Pause for Breath

(Seoul=Yonhap Infomax) On the 24th, the USD/KRW exchange rate is expected to open lower, hovering around the 1,470 won level.

After last week's sharp rally, the market appears poised for a brief pause at the recent highs.

The dollar-won rate has risen for five consecutive sessions, with a weekly gain of 18.60 won—a relatively large move. The regular session closed at 1,475.60 won, marking the highest level in seven months since April 9.

The recent pause in the strong dollar and weak yen trends is likely to temper further gains in the USD/KRW pair.

The US dollar turned lower as expectations for a Federal Reserve rate cut in December resurfaced. On the 21st, the US Dollar Index fell for the first time in six sessions, dropping to the low 100s.

John Williams, President of the Federal Reserve Bank of New York and a permanent voting member of the FOMC, made dovish remarks, stating, "I still see the possibility of adjusting the target range for the federal funds rate in the near term to bring policy closer to neutral."

This prompted markets, which had largely abandoned hopes for a December rate cut, to rapidly price in renewed expectations. According to CME FedWatch, the federal funds futures market now reflects a roughly 70% probability of a 25bp rate cut by the Fed next month, up sharply from the previous 30% range.

While several senior Fed officials remain skeptical about a December cut, dovish voices are resonating in the market. Notably, Fed Governor Steve Myron, known for advocating a 50bp "big cut," indicated he would support a 25bp cut if his vote proved decisive—signaling a willingness to compromise to achieve a rate reduction.

Although the US government shutdown has limited access to key economic data, supporting a cautious Fed stance, the growing prominence of rate cut arguments has put a brake on the strong dollar trend.

Overnight, Kevin Hassett, a candidate for the next Fed chair and White House National Economic Council (NEC) member, told Fox News that "next year will be a year of rate cuts," emphasizing expectations for blockbuster growth in 2025.

The yen's weakness has also paused. Bank of Japan (BOJ) Policy Board member Kazuyuki Masu reignited speculation of a rate hike, stating in a media interview that a decision to raise rates is drawing closer. This suggests the BOJ may not align with the government's implicit pressure for continued monetary easing.

As a result, the USD/JPY rate, which had been climbing toward 158 yen, retreated to the 156 yen level. This could open the door for a stronger won and a lower USD/KRW rate.

Additionally, with the dollar-won pair entering the 1,470 won range, caution over further upside is increasing. Not only authorities but also major players like the National Pension Service are likely to consider FX hedging at these levels, and exporters may increase dollar selling.

These factors suggest the USD/KRW pair faces greater downward pressure amid concerns over further gains.

The key variable remains foreign investor activity in the domestic stock market. On the 21st, net foreign selling in the KOSPI market exceeded 2.8 trillion won ($2.1 billion)—a rare scale not seen in over four and a half years. As a result, November's net foreign outflows have surpassed 12 trillion won ($9 billion).

While a rebound in the New York stock market could support a KOSPI recovery, continued foreign outflows may lead to custodial buying, exerting upward pressure on the USD/KRW rate.

Persistent buying of US equities by Korean retail investors ("Seohak Ants") is also a hurdle for a sustained decline in the dollar-won rate. According to Korea Securities Depository's SEIBro portal, net purchases of US stocks by Korean investors last week totaled about $930 million (1.3 trillion won), despite volatility and declines in the New York market.

Meanwhile, efforts to end the Russia-Ukraine war are underway again. The US and Ukraine held talks in Geneva, Switzerland, on a peace proposal put forward by former President Donald Trump. While both sides described the talks as productive, the path to a ceasefire remains challenging. However, if Trump's strong will leads to a risk-on sentiment, it could provide further justification for a lower USD/KRW rate.

Japanese financial markets are closed today for "Labor Thanksgiving Day." The Federal Reserve Bank of Dallas will release its November manufacturing activity index tonight.

In overnight trading ending at 02:00 KST on the 22nd, the USD/KRW closed at 1,471.50 won, down 4.10 won from the regular session close. In the New York non-deliverable forward (NDF) market, the 1-month USD/KRW contract was last quoted at 1,467.80 won (mid), which, factoring in the recent 1-month swap point of -2.20 won, represents a 5.60 won decline from the previous Seoul spot close of 1,475.60 won.

(Market Team, Economics Department)

ywshin@yna.co.kr

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