Goldman Sachs and Deutsche Bank anticipate additional rate hikes in March and January, respectively, while delaying the start of rate cuts.
As U.S. inflation exceeds expectations, the yen nears 160 per dollar, while the won-dollar exchange rate moves in the opposite direction.
Following stronger-than-expected U.S. inflation data, major Wall Street investment banks have revised their forecasts for additional interest rate hikes by the Federal Reserve (Fed). Goldman Sachs and Deutsche Bank now project more aggressive tightening than previously anticipated, contributing to a strengthening dollar and weakening yen and euro.
On the 11th (local time), the U.S. Dollar Index, which measures the greenback against six major currencies, rose to 102.85, marking its highest level since April 2025, as increased expectations for Fed rate hikes fueled buying interest.
Goldman Sachs and Deutsche Bank Forecast Additional Hikes
The catalyst for these revised outlooks was the U.S. October Consumer Price Index (CPI). According to the U.S. Department of Labor, the October CPI rose 0.4% month-on-month, exceeding the market consensus of 0.3%. The core CPI, excluding food and energy, also rose 0.3%, surpassing the expected 0.2%.
Housing costs rose 0.3%, food 0.5%, and energy 0.7% month-on-month. With rising energy prices, tariff burdens, and robust consumption, concerns are mounting that the Fed's tightening cycle could extend into next year.
Goldman Sachs now expects the Fed to raise the benchmark interest rate by 0.25 percentage points in March, following a hike in December. Previously, the firm viewed December as the final hike, but it has adjusted its outlook to account for the possibility of renewed inflation early next year. David Mericle, chief U.S. economist at Goldman Sachs, noted that even if inflation cools by year-end, it could rebound in early 2025. Consequently, Goldman Sachs has delayed its projected start for rate cuts by three months, from September to December 2027.
Deutsche Bank has taken a more hawkish stance, adding a 0.25 percentage point hike in January to its existing forecasts for December and March. Goldman Sachs is now predicting two additional hikes, while Deutsche Bank anticipates three.
Possibility of a December 'Big Step' and Yen Nearing 160
As Wall Street braces for further hikes, some within the Fed are advocating for more aggressive tightening, with discussions emerging regarding a potential 0.5 percentage point hike at the December policy meeting.
Fed Governor Christopher Waller stated on the 10th that while he supports a 0.25 percentage point hike in December, the committee should consider a 0.5 percentage point increase if core CPI rises by 0.3% or more. With the actual October core CPI hitting 0.3%, the probability of a 0.5 percentage point 'big step' hike, according to the CME FedWatch tool, jumped from near 0% to 13.5%. While a 0.25 percentage point hike remains the baseline, the 'big step' scenario has returned to market discourse.
The combination of hawkish Fed rhetoric and higher-than-expected inflation data has driven U.S. Treasury yields and the dollar higher, putting downward pressure on the yen and euro. The dollar-yen exchange rate neared 160 on the 11th, its weakest level in two months, sparking speculation about potential intervention by Japanese authorities. The euro also fell to the 1.11 level against the dollar.
Won Strengthens Despite Dollar Rally Due to Domestic Supply and Demand
In contrast to the dollar's strength against major currencies, the won-dollar exchange rate in the Seoul foreign exchange market declined.
On the 11th, the won-dollar exchange rate closed at 1,333.6 won, down 3.9 won from the previous trading day. Although it opened higher at 1,343.5 won following the U.S. inflation report, it reversed course during the session. Selling of dollars by exporters and an influx of foreign investment capital limited the rise.
Semiconductor exporters, in particular, increased the supply of dollars in the market by converting their overseas earnings into won. Furthermore, foreign investors net-purchased 655 billion won worth of stocks on the KOSPI, providing additional support for the won.
Min Gyeong-won, a researcher at Woori Bank, noted that exporters are likely to actively sell dollars rather than waiting for further exchange rate increases. While prolonged U.S. tightening could pressure the won, the daily exchange rate remains sensitive to domestic corporate dollar sales and foreign capital flows.
The Federal Open Market Committee (FOMC) is scheduled to meet on December 8-9 to decide on interest rates and release its outlook for the coming year.
