Dollar Weakness Expected..."Exchange Rate May Fall to 1,360 Won"

Weekly Exchange Rate and Bond Outlook

1,370-Won Lower Support Line

Fed Monetary Policy as a Variable

Focus on Base Rate Cuts

Declining Government Bond Yields

Last week, the KRW-USD exchange rate hovered in the 1,380-won range per dollar. The United States and China agreed to extend the tariff relief for 90 days, and expectations spread that the U.S. central bank (Fed) would cut rates in September, causing a slight decline. However, sluggish domestic stock markets and unstable supply-demand combined to limit the decline.

The main focus in this week's foreign exchange market is the upcoming Jackson Hole Meeting before next month's Federal Open Market Committee (FOMC). The Jackson Hole Meeting is an important event for gauging the Fed's monetary policy direction. Remarks by Jerome Powell, the Fed Chair, will be closely watched. Minhyuk Lee, an economist at KB Kookmin Bank, said, "Even as demand for dollars for overseas investment is increasing, dollar weakness is expected to prevail due to expectations for a Fed rate cut," adding, "If it falls below 1,375 won, a further drop to 1,360 won is anticipated."

However, if market expectations for a 0.5% base rate cut ('big cut') in September diminish at the Jackson Hole Meeting, the KRW-USD exchange rate may rise again. Seokhyun Baek, an economist at Shinhan Bank, predicted, "Although the recent worsening of employment conditions overlaps with last year's situation, inflation concerns remain for now," and added, "If disappointment spreads following Powell's speech, the exchange rate could rebound."

Kyungwon Min, an economist at Woori Bank, noted, "With real demand for dollars prevailing, most of the burden of a weak dollar can be offset," and said, "It is expected to move within the 1,380-won box range." Junghoon Seo, a researcher at Hana Bank, stated, "Considering the inflow of buying due to settlement demand from perception of a bottom, the lower end will be supported in the 1,370-won range."

Government bond yields showed a downward trend last week, particularly for mid-to-short-term maturities. According to the Seoul bond market, the 3-year Treasury bond yield closed at an annual rate of 2.404% on the 14th. It declined by 0.004% points after recording the lowest level since June at an annual rate of 2.408% the previous week. The U.S. Consumer Price Index (CPI) for July rose 2.7% year-on-year, influencing this trend. While the CPI growth rate was higher than in June, it aligned with market expectations and eased inflation concerns.

Bond market participants are confident that the base rate will be cut at the September FOMC. Expectations for Fed rate cuts have also been reflected in Korean government bond yields.

Experts expect the Bank of Korea to lower rates once more this year. They forecast that whether there will be an additional cut to an annual rate of 2.0% next year is a crucial point. Such sentiment is reflected in the market, sustaining the downward trend in government bond yields.

Many analysts believe the Jackson Hole Meeting will be a watershed event for determining rate direction. Last year, hints of a labor market slowdown in the U.S. were confirmed at the Jackson Hole Meeting held before the FOMC, raising the possibility of a big cut. Yeosam Yoon, a researcher at Meritz Securities, said, "Korean Treasury bond yields are showing a downward trend under the influence of expectations for U.S. rate cuts," adding, "The message coming out of the Jackson Hole Meeting will be a key variable for future rate direction."

Reported by Mihyun Cho and Jeongcheol Bae mwise@hankyung.com