S.Korean won near 2-month low as US data fans Fed hike views

The South Korean won skidded to a near two-month low on Friday as hotter-than-forecast US inflation data added to expectations that the Federal Reserve will keep raising interest rates to tame price pressure, widening interest rate differentials between the two countries.

The won lost as much as 1.5% to 1,303.8 per dollar, the weakest since Dec. 20, 2022, in the local foreign exchange market.

That came as data showed on Thursday that US producer prices rose 0.7% in January from the previous month, the largest increase since June last year, topping economists’ expectations of a 0.4% rise. On an annual basis, the wholesale prices advanced 6%, far above market forecasts of 5.4%.

In addition, the number of Americans filing for unemployment benefits unexpectedly dropped to 194,000 last week, indicating the job market in the world’s largest economy could weather the Fed’s further interest rate hikes after its aggressive tightening, analysts said.

“The PPI data dampened expectations of disinflation in the US,” said Kim Seung-hyuk, an economist at NH Futures Co. in Seoul, referring to the producer price index. Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.

“The US jobless claim number added to the case for further tightening, which will put pressure on the won against the dollar,” said Kim.

HAWKISH FED OFFICIALS

Fed officials took hawkish stances. Cleveland Fed President Loretta Mester on Thursday said she saw a “compelling” case for a second half-point rate hike earlier this month when the US central bank raised its benchmark interest rate 25 basis points (bps) to a target range of 4.5-4.75% in its eighth hike since March 2022.

Federal Reserve Bank of St. Louis President James Bullard also said he wouldn't rule out advocating for a larger hike of 50 bps at the Fed's next meeting in March.

By contrast, South Korea’s central bank is unlikely to take as aggressive tightening steps as those of its US counterpart, given the growing risks of a recession in Asia’s fourth-largest economy, analysts said.

The government on Friday admitted for the first time that the economy has slowed, inflicted by stubbornly high inflation and sluggish exports, a key growth. The finance ministry had been mentioning the possibility of an economic slowdown in its monthly economic assessment report, called the Green Book, since June last year.

In January, the Bank of Korea signaled a further cut in its growth forecast just two months after revising the expectation lower while raising its policy interest rate by a quarter point to 3.5%.

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