Korean Won, Chinese Yuan Set to Gain as US Interest Rates Expected to Drop

If the benchmark interest rate in the U.S. drops this year, the currencies of Asian countries, like the Korean won, the Chinese yuan, and the Indian rupee, are expected to strengthen.

According to a report by U.S. CNBC on the 18th (local time), experts predicted that the Korean won, which has been under pressure to lower interest rates for the past three years, could escape from this trend and benefit from global economic growth resulting from the U.S. interest rate cut.

“Korea has low-interest rates and high economic cyclicality, so if U.S. interest rates fall, the won will be less pressured to appreciate through the interest rate channel.” Simon Harvey, a foreign exchange analyst at Monex, said. “Moreover, a U.S. interest rate cut could lead to an increase in global growth prospects so that the won could be one of the currencies benefiting from the Fed’s interest rate cut in the second half of this year.”

However, Harvey predicted that the rise in the won would be determined by the extent of the Fed’s interest rate cut.

He said that if the interest rate cut is large, the won could rise by 5% to 10%, while if it is small, it could rise by about 3%.

The International Monetary Fund (IMF) forecasted Korea’s growth rate for this year and next year at 2.3% each, higher than last year’s 1.4%.

The Chinese yuan was evaluated as having reached a level where it can no longer fall. This is because Chinese authorities have prevented the yuan from falling below a certain level, making it challenging to fall further.

Aaron Bowers, Chief Investment Officer at Bel Air Investment, predicted that China would continue to stabilize the yuan-dollar exchange rate as it has in the past.

Bowers said, “If the yuan-dollar exchange rate rises to a certain level reflecting China’s economic situation (devaluation of the yuan), the authorities will actively interfere with fiscal policies, monetary and credit policies, and real estate support measures, so additional weakening would be difficult to see.”

He predicted the yuan-dollar exchange rate would “hover in a narrow range around the current exchange rate of 7.10 yuan per dollar.”

It was predicted that the Indian rupee would benefit from carry trade investing in high-interest countries with money borrowed from low-interest countries if U.S. interest rates fall.

Anindya Banerjee, vice president of Kotak Securities, said, “Carry trades are currently taking place in currencies like the yen and the euro, but if U.S. interest rates fall, the interest rate difference will widen and carry trades will be possible with the rupee as well.” He evaluated this as “positive for the rupee.”