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Korean won touches 18-month low as Fed may raise rates sooner

Vice finance minister pledges efforts to support won; Bank of Korea expected to raise interest rates on Jan. 14

By Jan 06, 2022 (Gmt+09:00)

Hana Bank headquarters' dealing room in Myeong-dong, Seoul, on Jan. 6
Hana Bank headquarters' dealing room in Myeong-dong, Seoul, on Jan. 6

South Korea’s won currency hit a 1-1/2-year low as the US Federal Reserve signaled the central bank may raise interest rates sooner than expected, adding to expectations that the Bank of Korea will increase borrowing costs to stem inflation in Asia’s fourth-largest economy.

The won on Jan. 6 finished domestic trading down 0.3% at 1.201 against the US dollar, the weakest close since July 24, 2020. The local currency had recouped some of the initial losses to trade around 1,197 during the session as the foreign exchange authorities warned against its rapid decline, but it failed to maintain that recovery until the end of the day.

The won weakened past the psychologically important 1,200 per dollar mark seen when the economy faces a headwind. The South Korean currency is softer than the level during the global financial crisis from September 2008 to September 2009, as well as the European debt crisis from January 2010 to May 2010.

The US-China trade dispute and Japan’s restrictions on exports to South Korea have pushed the won below levels seen from August 2019 to October 2019. The local currency was also weaker than its dip in February to July of last year due to COVID-19.

FED, BANK OF KOREA TO RAISE RATES

The latest weakness, however, came as the Fed indicated it will tighten the monetary policy earlier than expected. The policy stance offset the won’s support from South Korea’s strong economic fundamentals.

Fed officials said in their December meeting that a "very tight" job market and unabated inflation would require the central bank to raise interest rates earlier than expected and start reducing its overall asset holdings, according to minutes from the meeting.

Higher interest rates and quantitative tightening attract global investors, ramping up US Treasury yields and the dollar.

South Korea’s currency authorities tried to support the won, saying the country is ready to take measures to stabilize the foreign exchange market.

“The recent foreign exchange movement has resulted from growing external uncertainties due to changes in major countries’ monetary policies,” said First Vice Finance Minister Lee Eog-weon. “The government plans to increase efforts to stabilize the market if herd behavior occurs and market volatility increases.”

The authorities are more likely to step into the market as today's warning failed to support the won, market sources said. A weaker won usually raises import prices, especially when crude oil and other commodity prices rise, as well as overall inflation eventually.

The Bank of Korea is expected to raise interest rates during its policy meeting on Jan. 14 to fend off inflationary pressure and bolster the won.

Write to Ik-Hwan Kim at lovepen@hankyung.com

Jongwoo Cheon edited this article.
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