Effects of U.S. Credit Rating Downgrade... Won-Dollar Exchange Rate Approaches 1,400 Won

# South Korean Won Approaches 1,400 Against the Dollar Amid Heightened Risk Aversion The South Korean won is nearing the crucial 1,400 level against the U.S. dollar as global markets react to increased risk aversion following a U.S. credit rating downgrade. This situation highlights fresh concerns over fiscal stability and inflation pressures. On October 19, the Seoul forex market reported the USD/KRW exchange rate closing at 1,397.8 won, an 8.2 won rise from the previous close of 1,389.6 won. The session started at 1,395.1 won, up 5.5 won from the last trading day and temporarily peaked at 1,401.3 won before slipping. The low for the day was 1,392.5 won. The prior trading session on October 16 ended with the won at 1,389.6 per dollar, down by 4.9 won from the session before, marking the lowest level since November 8, 2022. # U.S. Credit Downgrade Spurs Safe-Haven Demand The increase in the USD/KRW exchange rate is primarily driven by risk-averse behavior prompted by Moody's downgrade of the U.S. sovereign credit rating. Inflation concerns further intensified the upward pressure on the exchange rate. On October 16, Moody's Investors Service downgraded the U.S. credit rating from Aaa to Aa1 due to a growing fiscal deficit and dim prospects for improvement. The agency stated, "The fiscal deficit of the U.S. government is widening, and substantial improvement appears unlikely in the foreseeable future." Historically, U.S. credit downgrades have led to a stronger dollar as investors move towards safe-haven assets. However, this decline’s impact was softened as it was widely anticipated. A similar event occurred in 2011, when the U.S. sovereign credit rating was downgraded for the first time, causing the USD/KRW rate to jump from approximately 1,050 won in late July to over 1,180 won by late September. In August 2023, when Fitch Ratings downgraded the U.S. credit rating, the won weakened from the 1,270 level to the 1,340 range within days. # Inflation Risks Intensify Market Pressures Concerns about U.S. inflation have added momentum to the rising exchange rate. A University of Michigan survey indicated a one-year inflation expectation increasing to 7.3%, the highest level in about 40 years, augmenting the strength of the dollar. # Equities Dip Amid Foreign Selling South Korean equities mirrored the risk-averse sentiment. The KOSPI index declined by 0.89%, closing at 2,603.42 on Thursday. The tech-heavy KOSDAQ fell by 1.56%, ending at 713.75. Foreign investors were net sellers, offloading 169.2 billion won in KOSPI shares and 49.6 billion won in KOSDAQ stocks. The dynamics in currency and equity markets reflect global economic uncertainties—driven by credit downgrades, fiscal instability, and rising inflation expectations—continuing to impact investor confidence and elevate demand for safe-haven assets.