We’re continuing our annual outlook. However, since it’s a weekday essay, the progress is not as easy as I thought. Now we have the bond market and China story left, and we’ll sort it out to some extent through this weekend’s essay. And we’ll have to sort it out. In the end, what we need to pay attention to in this year’s annual outlook will be the question of whether it’s possible to live well alone in the United States. Nevertheless, Trump appeared while the question was still being asked.
After all, if the U.S. economy is too strong… The dollar is going to be infinitely strong, reflecting a strong U.S. economy, and U.S. interest rates are going to go up, not to mention the overheating of the stock market or the real estate market… If Amateur like me is predicting this, players in the market are already… no, most investors are full-betting in this direction. With the dollar strengthening… And holding out at high interest rates… I think that’s what the U.S. market is going through right now, but… If I eat too much, won’t my stomach explode? T.T
In the minutes of the previous day, the Fed says that the current level of interest rates is tighter. It’s a pretty significant phrase. And it could be a jumping point to discuss interest rate hikes. Reflecting a very strong U.S. economy, the Fed also feels like it’s shifting its stance in just four months, leaving behind the last 100 basis points of interest rate cuts. And when the FOMC in December of last year hinted at two annual rate cuts in 2025, the financial markets are looking at the possibility of one by the end of the year. Market expectations are tighter than the Fed’s hawkish predictions. And these market changes… In other words, the gradual formation of expectations that interest rates will not sink below is creating the current high interest rates.
U.S. interest rates will remain high. Usually, non-US countries, including South Korea, will follow the upward decline in U.S. interest rates to a significant extent. In the face of rising U.S. interest rates in 2022, they followed a substantial high-interest rate trend with the 5% U.S. Treasury rate in October 2023. By the way… It’s a different story this time, compared to the U.S. 10-year interest rate of 4.68%… Korea’s 10-year interest rate is around 2.8%. The interest rate difference between the two is 185bp. The gap between Korea and the U.S. has widened to a record level. The U.S. is holding out to avoid a rate cut… Korea’s domestic economy is so bad that we have to cut interest rates to cover it. So this has to happen. So Korea’s interest rates are much lower than the U.S. So, of course, investors are going to have to escape to the U.S. and that’s the exchange rate that’s covering it. The floating exchange rate is… Unlike the fixed exchange rate, the top and bottom move without restriction. The higher exchange rate is digesting the inverted interest rate. Yes. If you look at 2023 and you take interest rates to the level of the U.S. while stabilizing the exchange rate… This time, it seems to open the exchange rate by letting interest rates play separately from the United States. However, the focus is on controlling the rate of increase in the exchange rate.
Allowing a certain level of interest rate difference between the two countries… I try to improve my country’s economy… I tolerate a certain increase in the exchange rate… I mean… It means that the paradigm has changed from the past when we tried to stabilize the exchange rate by adjusting the interest rate level… In another sense, even if the exchange rate goes down, it’s going to be very hard to get to those beautiful levels of the past. Not just Trump’s tariffs… Exchange rate war among countries in response to this… This is the product of creation.
The rise of the exchange rate is a response to the exchange rate war for Korea… For the U.S., it’s a forced strengthening of the dollar. The widening of the interest rate gap means that the U.S. will maintain high interest rates. Korea will use low interest rates to generate momentum to weather this difficult situation. Then, Korea will have weak won and low interest rates… The U.S. is going to have a high interest rate on the strong dollar.
The combination of weak won and low interest rates is actually very dangerous. Weak won creates a problem of rising import prices… If interest rates are low in the face of inflation, inflation can explode. However, domestic demand is so weak… Without a surge in energy prices… There is a limited possibility of inflation in the short term. Then, it will be possible to combine weak won and low interest rates even if it is burdensome. On the other hand, the U.S. faces a strong dollar and high interest rates. What about the strong dollar? What about the export? What about the high interest rates in the U.S.? The U.S. has a very strong economy, so it’s okay… You might think that, yes… This is the point. If the U.S. is strong alone, you have to take the strong dollar and the high interest rate. How strong the U.S. can be in the combination of the strong dollar and the high interest rate… That’s the whole point. If you don’t get through this…. It shows that it’s a difficult proposition to die and live well alone in the United States. I think this is why the US stock market is showing a bit of a daze right now.
And before and after the inauguration of the second Trump administration… And the expectation that the U.S. fiscal deficit will increase… Fears that the imposition of universal tariffs could be a boomerang, or that Trump’s policies may be difficult to proceed as expected… I think these are probably factors that can generate market doubts about the U.S. economy that look so perfect. I’ll go on to the essay. Thank you.