The exchange rate, which plummeted by 200 won in the past two months, is having complex effects on exports and domestic demand, suggesting a possibility of structural change beyond a simple decline.
At the time, the main cause was the spread of rumors that the Trump administration was pushing for a weak dollar through reports like the 'Mirand Report.' It is analyzed that the strong belief in a strong dollar prevalent in the market was broken, leading to the unwinding of this speculative bias.
A rising exchange rate leads to a weaker won and a stronger dollar, increasing the price competitiveness of won-denominated products and contributing to export growth. However, it simultaneously makes imported goods more expensive, leading to higher import prices and upward pressure on domestic interest rates. Conversely, a falling exchange rate stabilizes import prices, helping to revitalize domestic consumption, but it burdens export companies by weakening their price competitiveness. Therefore, exchange rate decisions must consider the complex trade-off between exports and domestic demand, not just a single factor.
For example, even if a country faces a 10% tariff, it can gain a relative advantage if its export competitors face a 20% tariff. Even if the price of domestic products becomes more expensive, if they are less expensive than competing countries' products, export competitiveness can be maintained or even improved. Exchange rate appreciation is similar; its relative fluctuation range must be understood in comparison to neighboring currencies. One should not simply judge the appreciation of one's own currency as an unconditional negative for exports.
The size of the domestic market alone has clear limitations in driving global demand, and this cannot be considered a sustainable upward trend. For won strength to have a positive effect, other countries' currencies must also appreciate.
Immediately after Trump's election in 2016, the won-dollar exchange rate temporarily rose but then shifted to a downward trend. During the COVID-19 pandemic, the exchange rate surged, showing high volatility, but by the end of his term, it remained around 1120 won, similar to its starting level. This means that during the Trump administration, the exchange rate showed significant volatility with repeated rises and falls rather than a clear trend.
This is because 'isolated strength,' where only one currency strengthens, is difficult to sustain long-term. There was a past instance when, during a period of reduced North Korean risk, only the won strengthened, but eventually reverted. This demonstrates the importance of currency synchronization (alignment) in the exchange rate market.
Even after surpassing 5% in October 2023, there was an instance where interest rates sharply declined. This suggests that despite the symbolic nature of the 5% figure, the market prioritizes structural changes and sustainability over short-term levels.
Similar to exchange rates, the speed of interest rate hikes significantly impacts the economy. Whether interest rates rise slowly or rapidly determines whether economic agents have time to manage and respond to risks. Rapid interest rate increases can deprive businesses and households of the flexibility to plan and adjust their finances, causing a major shock to the overall economy. Bank of Korea Governor Rhee Chang-yong also emphasized the importance of speed, stating, 'Look at volatility, not the level.'
At that time, concerns about low growth were so significant that arguments were made for high-pressure economic policies to foster recovery. However, with the changing economic environment, new assessments are being made regarding the possibility of structural growth, different from the past. This movement re-examines the economy's growth path from a long-term perspective, not just a temporary economic rebound.
Comparing the historical levels of the US 10-year Treasury yield, we can see that current interest rate levels are approaching past averages. This leads to a new interpretation of the 'Higher for longer' stance, not as a simple tightening policy, but as an interest rate level appropriate for a structural growth environment.
What is important is whether the interest rate increase is due to inflation and debt burden, or if it is a result of robust growth. Interest rate increases accompanied by growth can be viewed positively, but if inflation and debt burdens are excessive, they can negatively impact the economy. At the current interest rate level, sophisticated analysis is required to find the economic optimum.
After the sharp decline in August 2024, the market experienced significant trauma regarding the unwinding of the yen carry trade. This past experience has led the Bank of Japan (BOJ) to adopt a very cautious stance on policy decisions, becoming a major factor in observing market sentiment. Currently, the possibility of a BOJ interest rate hike in December or January is being discussed, but its speed and method are expected to proceed very cautiously due to lessons learned from the past.
Instead, the possibility of a US economic recession, that is, signals of an economic downturn such as the 'Sahm Rule,' could act as a more important trigger. Investors are more sensitive to the risk of asset value depreciation than to interest rate differentials, so if the US economy shows signs of collapse, they are likely to quickly liquidate their positions. If the US re-enters an interest rate hike cycle, these variables could become complexly intertwined, causing unexpected impacts on the market.
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