The United States has warned of the end of the reciprocal tariff suspension next month, causing fluctuations in the foreign exchange market. The won-to-dollar exchange rate has surged over 1,370 won, reaching its highest level since mid-last month, and some have raised the possibility of it hitting 1,380 won. As concerns about financial instability grow due to the sudden rise in exchange rates, voices have emerged suggesting that the Bank of Korea's rate cut may be delayed.
◇ On the 11th, the won-dollar exchange rate closed at 1,375.4 won… maintaining the 1,370 won range for three days
According to the Seoul Foreign Exchange Brokerage, on the 11th, the won-dollar exchange rate closed at 1,375.4 won, up 5.4 won from the previous day's weekly transaction closing price (as of 3:30 p.m.), maintaining the 1,370 won range for three days. It is the first time the exchange rate closing price has exceeded 1,370 won since the 23rd of last month (1,384.3 won). On the 9th, during trading, it even rose to 1,377.9 won, nearing 1,380 won.
On the 7th, U.S. President Donald Trump stated in a letter addressed to President Lee Jae-myung that "a reciprocal tariff of 25% will be imposed starting August 1," leading to a continued rise in exchange rates. The U.S. is already imposing item-specific tariffs of 25% on automobiles and parts, and 50% on steel and aluminum, increasing the likelihood of additional reciprocal tariffs on other products.
The dollar value is showing strength as the U.S. implements reciprocal tariffs. According to Investing.com, the Dollar Index (DXY), which shows the dollar's value against six major currencies, dropped to around 96 on the morning of the 7th before the tariff letter was made public, but by 1 a.m. on the 8th, it rose to 97.55. By 4 p.m. on the 11th, it had climbed to 97.81, approaching 98.
Experts predict that if trade conflicts persist, the exchange rate could rise to 1,380 won. On the 8th, Min Kyung-won, a researcher at our country’s Woori Bank, suggested a ceiling for the exchange rate at 1,380 won, noting that "the contents demanded by the U.S. in future negotiations are likely to exert downward pressure rather than upward pressure on the won," and that "the strengthening of the dollar due to rising trade tensions and the actual demand for dollars in the region are expected to drive up the exchange rate."
Wi Jae-hyun, an economist at NH Futures, noted that "after the announcement of the reciprocal tariff in April, the market responded with a weaker dollar trend due to the liquidation of dollar assets. However, it is currently reacting strongly to the issue of tariff suspension in the foreign exchange market, indicating that the dollar is once again moving as a safe asset, which suggests the exchange rate will face upward pressure."
Some anticipate that if the U.S. imposes a 25% reciprocal tariff on Korean products as announced, the exchange rate could rise to 1,400 won. Park Sang-hyun, a senior researcher at iM Securities, stated, "Considering that the reciprocal tariff imposed on Vietnam was reduced from 46% to 20% during negotiations, it seems reasonable that a tariff of around 15% would apply to our country, which initially faced a 25% tariff. If the reciprocal tariff is set higher than this, it may be difficult to maintain an exchange rate in the 1,300 won range."
◇ Will the rate cut in August be delayed… Exchange rates and U.S. interest rate decisions are variables
The sudden rise in exchange rates is expected to influence the Bank of Korea's decision on its benchmark interest rate. Currently, the market perceives that the Bank of Korea will lower interest rates in the August Monetary Policy Committee meeting while monitoring the uptrend in housing prices in the metropolitan area. However, if the upward trend in exchange rates continues, the outflow of foreign capital could deepen, making it difficult for the Bank of Korea to readily cut interest rates.
Kim Chan-hee, a researcher at Shinhan Investment Corp, noted that "if the reciprocal tariff is imposed higher than expected, the exchange rate will face upward pressure in the short term," adding, "While the possibility is slim, if the exchange rate breaks above 1,400 won during this process, external conditions may worsen and market volatility may increase, leading the Bank of Korea to delay interest rate cuts."
The delay in interest rate cuts by the Federal Reserve is also expected to exacerbate the rise in exchange rates. Woo Hye-young, a researcher at LS Securities, stated that "the market is predominantly viewing that the Fed will lower interest rates in September," and added that "if the Bank of Korea cuts rates before that, the interest rate differential between Korea and the U.S. would widen to a record 2.25 percentage points (with the upper limit basis being 2.25% for Korea and 4.50% for the U.S.). This could lead to a severe outflow of foreign capital and push the exchange rate to a dangerous level."
However, there are also claims that the exchange rate is not yet at a level that could impact monetary policy. Joint Rock, an economist at Daishin Securities, stated that "the recent won-dollar exchange rate has already reflected the effects of the state of emergency and reciprocal tariffs," and added, "While the market may respond differently if monetary policy changes due to issues like rising housing prices, I believe that at least the tariff issue will not drive the exchange rate higher."
There are also opinions suggesting that tariffs could actually lower the exchange rate. Moon Hong-cheol, a researcher at DB Investment & Securities, mentioned that "generally, tariffs are expected to induce a strong dollar, but in April of this year, the dollar actually weakened. This was interpreted in the market as the U.S. growth slowdown linked to the imposition of reciprocal tariffs," and he added that "if this trend continues, imposing tariffs could induce a strengthening of the won, making it easier for the Bank of Korea to lower interest rates."
The Bank of Korea is monitoring the flow of exchange rates. Lee Chang-yong, governor of the Bank of Korea, mentioned at the 75th anniversary ceremony held on the 12th of last month in the Bank of Korea's annex in Jung-gu, Seoul, that "although the recent won-dollar exchange rate has decreased to the mid-1,300 won range, the interest rate differential between Korea and the U.S. may widen further depending on the pace of U.S. rate cuts, and there is considerable uncertainty related to trade negotiation outcomes," emphasizing vigilance against foreign exchange market volatility.