Won-dollar rate back on roller coaster as 1,400-won mark looms

The Korean won has come under renewed pressure, reversing much of its recent gains against the U.S. dollar as tighter U.S. monetary policy, higher oil prices and reduced dollar supply in the local foreign exchange market weigh on the currency, analysts said Tuesday.

The won-dollar exchange rate rose nearly 50 won over seven consecutive trading sessions through Friday from its Sept. 9 level, bringing the 1,400-won mark back into focus.

The exchange rate has fluctuated sharply in recent weeks. It stood at 1,411.8 won per dollar on Aug. 18 and slid to a 23-month low of 1,336.1 won on Sept. 9 as dollar selling by major semiconductor exporters increased foreign currency supply.

That trend quickly reversed the following day, with the rate rising for seven straight sessions through Friday, up 47.2 won from its Sept. 9 close.

The won recovered some ground Tuesday, with the rate retreating to close onshore trading at 1,358.2 won per dollar.

The U.S. Federal Reserve’s rate hike has been a key factor behind the recent rise in the exchange rate.

The Fed raised its benchmark rate by 25 basis points at its Sept. 16 Federal Open Market Committee meeting, lifting the target range to 3.75 percent to 4 percent from 3.5 percent to 3.75 percent. The move marked its first rate increase since July 2023, while signaling that further tightening this year remains possible.

The decision widened the interest rate differential between Korea and the United States. Despite back-to-back rate hikes by the Bank of Korea (BOK) in July and August that brought its benchmark rate to 3 percent, the gap with the upper end of the U.S. policy range widened to 1 percentage point from 0.75 percentage points.

Oil prices have added another source of pressure. As Korea relies heavily on imported energy, higher crude prices increase the amount of dollars needed by domestic companies to pay for imports, adding downward pressure on the won.

Foreign investors’ selling of Korean stocks has further weighed on the currency, leading market watchers to see room for the exchange rate to test the 1,400-won threshold again in the near term.

Still, the recent depreciation does not necessarily signal the beginning of a sustained slide in the won, according to analysts.

“The Fed’s rate hike has fueled dollar strength, so the possibility of the exchange rate reaching 1,400 won needs to be taken into account,” said Lee Yoo-jung, a researcher at Hana Bank. “With the U.S. economy remaining resilient and inflation still elevated, further tightening cannot be ruled out. What the Fed does next will therefore be important.”

Lee underscored that the won’s underlying fundamentals have not weakened significantly, citing semiconductor exports, Korea’s economic growth and the BOK’s hawkish stance.

“The recent rise in the exchange rate can largely be viewed as a move driven by broad dollar strength,” Lee added.