Korea won sees largest drop in 1 month on hawkish Powell

The South Korean won currency on Wednesday suffered its largest depreciation in more than a month as Federal Reserve Chairman Jerome Powell signaled US interest rates could rise more than expected, widening rate differentials between the two countries and hurting risk appetite.

The won ended the domestic currency market down 1.7% at 1,321.4 per dollar, the biggest daily decline since Feb. 6. The local unit has dropped 4.3% versus the US currency so far this year.

“Powell’s remarks are likely to cause investors to liquidate currency bets on slower US rate hikes and build up fresh positions based on expectations of the Fed’s more aggressive tightening,” said Kim Seung-hyuk, an economist at NH Futures Co. in Seoul, adding the won is expected to weaken further.

“The depreciation may slow, however, as exporters are expected to buy the won when it is weaker than the 1,300 level and the foreign exchange authorities may step in to prevent its sharp weakness.”

Powell on Tuesday said interest rates are likely to head higher than Fed policymakers had expected.

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said to the US Senate Banking Committee. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

FED TO RESUME AGGRESSIVE RATE HIKE

The comments spurred expectations that the Fed may raise its benchmark interest rates by 50 basis points at its policy meeting March 21-22. That would increase interest rate differentials between the US and South Korea to up to a record 1.75 percentage points.

Last month, the US central bank raised its federal funds rate by 25 bps to a target range of 4.50-4.75%, while the Bank of Korea held its policy interest rate unchanged at 3.50%.

The looming increase in interest rate gaps caused some analysts to predict the South Korean central bank would tighten monetary policy as wider differentials are likely to put more pressure on the won and spur capital outflows. The BOK had widely been predicted to keep the base interest rate, given growing risks of a recession in Asia’s fourth-largest economy on sluggish exports.

Samsung Securities Co. said the BOK will increase the rate by 25 bps when its policymakers meet on April 11. The brokerage house earlier forecasted that the central bank would leave the rate unchanged.

“Expectations of a higher peak of the US benchmark interest rates grew enough to justify an additional hike in South Korea’s policy interest rate,” said Kim Jiman, a senior analyst at Samsung.

Reflecting such views, government bond yields rose across the board with the highly liquid three-year debt yield up 12.9 bps to close the local market at 3.855%, according to the Korea Financial Investment Association.

South Korean stocks tumbled as the Fed is expected to take more aggressive steps. The main Kospi shed 1.28% as foreign investors turned to sellers by unloading a net 93.8 billion won ($71.1 million) after purchases in the previous two consecutive sessions.

Write to Do-Won Lim at van7691@hankyung.com
 
Jongwoo Cheon edited this article.