Exchange rate hits 1,200-mark on hawkish FOMC minutes

KOSPI, Kosdaq plunge on preference for safe assets

By Lee Min-hyung

The won-dollar exchange rate passed the worrying threshold of 1,200, Thursday, for the first time in three months, on the U.S. Federal Reserve's hawkish signal of interest rate hikes earlier than expected previously.

The exchange rate closed at 1,201 won per dollar, up 4.1 won from the previous trading day. Since early last year, the Korean won has continued to lose ground against the dollar on widening financial uncertainties here and abroad amid the unceasing spread of the coronavirus. The last time the figure reached the 1,200-mark was on Oct. 12.

The rate's surge came after the Fed released its more than hawkish minutes of the latest Federal Open Market Committee (FOMC) meeting, during which it justified an earlier-than-expected key rate hike amid escalating inflation pressures there.

The Korean stock market was also hit by the aggressive tightening gesture from the Fed, which also resulted in an overnight fall on Wall Street. The S&P 500 and Dow Jones tumbled over 1 percent, with the Nasdaq extending a bigger loss of more than 3 percent due to the minutes, Wednesday.

The benchmark KOSPI plunged by 1.13 percent and closed at 2,920.53 points on the same day. The secondary Kosdaq also closed with a drop of 2.9 percent at 980.3 points. Retail and overseas investors purchased Korean shares worth 309.7 billion won and 113.5 billion won, respectively, while institutional investors dumped local stocks worth 440.8 billion won.

The market expected the preference on safe assets to remain in place at least until the Fed starts its rate hikes, possibly around the end of the first half of 2022.

As the Fed's rate hike will drive a foreign capital outflow from the Korean stock market, chances are the main bourse will be exposed to downward pressure for the time being, analysts said. The U.S. dollar will also likely gain stronger ground against currencies from emerging countries following the U.S. rate hike, they said.

“Overseas investors are more sensitive to the U.S. interest rate than investors in Korea when purchasing stocks here,” said Yoon Deok-ryong, a researcher at the Korea Development Institute.

There is fear that the pessimistic outlook on the Korean stock market will drive retail investors into a corner ahead of the planned rate hikes from the Fed and the Bank of Korea (BOK).

Given the series of hawkish remarks from BOK Governor Lee Ju-yeol, the Korean central bank is also forecast to increase the key rate by 25 basis points to 1.25 percent during the upcoming rate-setting board meeting slated for Jan. 14.

The unceasing uncertainty surrounding the spread of the COVID-19 pandemic and its variants will also come as another form of downward pressure on the global economy and the local capital market, according to Hi Investment & Securities analyst Park Sang-hyun.

“The global economy will face another panic if the ongoing rise of the infection cases keeps paralyzing the medical systems here and abroad,” the analyst said. “We need to wait and see how seriously the pandemic shock will escalate until the end of January, but our expectation is that the Korean economy will finish a short adjustment period and enter an expansionary cycle soon.”

Regarding concerns over the steep rise of the won-dollar exchange rate, First Vice Finance Minister Lee Eog-weon said Thursday that the ministry would carry out market stabilization measures if the volatility widens further.