Korean currency weakens to 1,300 won level for 1st time in nearly 13 years

Electronic signboards at Hana Bank in Seoul show the benchmark Kospi fell 1.22 percent to 2,314.32 points while the Korean currency closed at 1,301.8 per dollar, weakening by 4.5 won from the previous close, Thursday. Yonhap

By Yi Whan-woo

The Korean won weakened to the 1,300 level against the U.S. dollar for the first time in nearly 13 years, Thursday, heightening concerns over an accelerated hike in the benchmark interest rate, widening trade deficit and other problems linked to the won's rapid depreciation that can further slow the Korean economy.

Analysts expect the local currency to continue to lose ground against the greenback and hit the 1,350 won level. They noted that the 1,300 won level has been a psychological threshold and breaching such a level could prompt more investors to sell the Korean currency in exchange for safe-haven assets.

On Thursday, the won closed at 1,301.8 per dollar, depreciating by 4.5 won from Wednesday's close _ the weakest level since July 14, 2009 when it ended at 1,303.0 won in the midst of the 2008-09 global financial crisis.

The currency opened at 1,299.0 won and took about 10 minutes to reach 1,300 won.

The won has been taking a beating against the dollar due to increased external economic risks, noticeably a prolonged war in Ukraine, a global energy crunch, and the U.S. Federal Reserve's policy rate hike.

Thursday's won-dollar exchange rate especially came after Fed Chairman Jerome Powell signaled a day earlier that the American economy is at risk of tipping into a recession and that there will be additional hikes in the U.S. key interest rate after it was raised three times since March to tame inflation.

U.S. Federal Reserve Chairman Jerome Powell testifies before the Senate Banking, Housing, and Urban Affairs Committee in Washington, D.C., Wednesday (local time). AFP-Yonhap

"We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy," he told the Senate Banking Committee on monetary policy.

After hitting new annual lows this week, benchmark Kospi extended its losing streak and closed at a 19-month low of 2,314.32, down 1.22 percent from a day earlier.

Under the circumstances, analysts did not rule out prospects of the Korean currency depreciating to the 1,350 won level in the short term.

They underscored that the won breaching the 1,300 level is rare and thus is considered as a sign of major economic risks.

Such a breach occurred only three times in the past, including the 1997-98 Asian financial crisis and 2001-02 period when a weakened yen resulting from Japan's zero-interest rate policy affected the won-dollar exchange rate.

"The won breaking into the 1,300 level is something that the market has not seen since the global financial crisis, and we should embrace the possibility of the won-dollar exchange rate hovering at around 1,350 won," said Woori Bank economist Min Gyeong-won.

Shinhan Bank economist Baek Seok-hyun voiced a similar view, saying, "The won's depreciation is enhancing the bleak economic outlook, and accordingly, can lead to an additional depreciation."

The trade-reliant Korean economy is anticipated to suffer from a sharper rise in import prices, with its year-on-year increase rate outpacing that of exports for 12 consecutive months.

For instance, the nation's imports totaled $339.3 billion during the first 20 days of June, up 26.8 percent from a year earlier, compared to value of exports that rose 15.4 percent to $323.8 billion during the cited period.

In return, the trade balance has turned red and posted a deficit of $15.4 billion so far this year. It is speculated that such a deficit in the first half may set a new high and that it will grow faster in the latter half.

"A weakening won does not appear to have much impact on increasing exports, but is rather causing consumer prices to soar," said Joo Won, the deputy director of the Hyundai Research Institute, adding this is because other currencies depreciated against the dollar.

Against this backdrop, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho on Thursday vowed to "minimize market anxiety caused by a volatile won-dollar exchange rate."

"The government will try to take measures to stabilize the market and ease unbalanced supply and demand," he said during an emergency meeting of economy-related ministers at the Government Complex Seoul.

Concerning the benchmark interest rate, Bank of Korea (BOK) Deputy Governor Lee Seung-heon hinted at the possibility of another hike in the BOK's upcoming rate-setting meeting, July 13.

The BOK raised the base rate to 1.75 percent in its previous May meeting _ the highest level since the pandemic era _ over fast-growing inflation estimated to be in the range of 4 percent this year.

"The BOK should preemptively manage its monetary policy with priority given to preventing rising prices from leading to further inflation expectations," he said during a financial forum in Seoul, also on Thursday.