Korea won hits 2-month high on US election, China hopes

The South Korean won on Wednesday hit a two-month high on expectations that a victory by the Republicans in the US midterm elections may slow the Federal Reserve’s tightening moves. The currency found further support as investors predict China to ease its zero-COVID policy, helping a recovery in South Korea’s top export market.

The won gained up to 1.8% to 1,360.2 against the dollar, its strongest level since Sept. 2, in the local foreign exchange market in the early afternoon, on course to extend its winning streak to a fourth session.

The local unit had been weaker than the psychologically important 1,400 per dollar level since early October, tumbling to as weak as 1,444.2 on Oct. 25, its softest point since the 2008-09 global financial crisis.

Investors reduced bearish bets on the South Korean currency as the US Republican Party is more likely to beat the Democrats in the elections. The Republicans, which have been blaming the Biden administration’s massive spending plans for the rampant inflation in the world’s top economy, are expected to adjust the fiscal policy. That may allow the Fed to raise its interest rate less aggressively than before.

China is also predicted to relax its rigid zero-COVID restrictions, improving sentiment on risky assets including South Korean shares and currency, even though Beijing continues to dampen such hopes, reiterating the country’s commitment to eliminating COVID-19.

Foreign investors bought a combined net 1.8 trillion won ($1.3 billion) worth of Seoul stocks on the main Kospi in the first eight days of the month, according to data from the Korea Exchange.

NO END TO BEARISH TREND

The won is unlikely to reverse its downward trend, however, currency market participants said.

“The won may come under pressure again if inflation peaks out later than expected, geopolitical tensions widen further and the current account balance keeps deteriorating,” said the Korea Institute of Finance (KIF).

In the first nine months of the year, South Korea logged a current account surplus of $24.1 billion in total, less than half of the $67.4 billion a year earlier, on sluggish exports and higher imports, according to the Bank of Korea.

The institution expected the won’s average value for this year to weaken to the 1,360 per dollar level, the weakest since 1998 when South Korea was mired in the Asian financial crisis.

Woori Bank’s economist Min Kyung-won also said the won is predicted to remain weak, given the Fed’s policy meeting in December when the US central bank may raise its federal funds rate again.

The South Korean unit has been the worst performer among emerging Asian currencies with a loss of some 14% against the dollar so far this year.

Write to Mi-Hyun Jo at mwise@hankyung.com
Jongwoo Cheon edited this article.