Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Fed's less-hawkish-than-expected tone to ease volatility in financial market: analysts
Electronic signboards at Hana Bank in Seoul show the benchmark KOSPI fell 0.11 percent to 2,677.57 points at the closing bell, while the value of the local currency against the dollar rose to 1,266.30 won per dollar, Wednesday. The financial market will resume after a break on Children's Day, Thursday. Yonhap
By Yi Whan-woo
BOK likely to deliver additional rate hike on May 26 to prevent reversal in interest gap
By Yi Whan-woo
The volatility in the Korean financial market is likely to ease in the short term due to the latest half-percentage-point increase in the U.S. interest rate, as the level of the hike was within market expectation, according to analysts, Thursday.
They said the Federal Reserve had been pointing repeatedly to such a “big-step” rate hike since its previous rate-setting meeting on March 16, and that currency and stock markets in Seoul took into account any resulting shocks in advance.
The experts also said the fact that Fed Chair Jerome Powell ruled out the possibility of a 0.75 percentage point increase, or a “giant step” in the benchmark interest rate, can further help the Korean won and the benchmark KOSPI recover after they mostly took a beating this year.
“The outcome of the Fed's rate-setting meeting was within market expectation overall,” the Bank of Korea (BOK) said in a press release in response to a 50 basis point increase, Wednesday, which was the largest since 2000.
The BOK described Powell's comments as “dovish” in that the Fed is ready to approve similar-sized rate hikes at policy meetings scheduled in June and July but is not “actively considering” a rate hike of 75 basis points.
Federal Reserve Board Chair Jerome Powell speaks during a press conference at the Federal Reserve in Washington, D.C., Wednesday. The Fed intensified its drive to curb the worst inflation in 40 years by raising its benchmark short-term interest rate by a sizable half-percentage point. AP-Yonhap
Against this backdrop, foreign exchange market analysts speculated that the dollar will lose strength and that the Korean won can make slight gains against the dollar.
The local currency has been on a downward trajectory, on April 28 dropping to the 1,270 won level against the dollar for the first time in 25 months.
Following the Fed's Wednesday rate-setting meeting, the U.S. Dollar Index (DXY) toppled from a five-year high and fell 0.9 percent to 102.450.
“The Fed's interest rate decision was already anticipated and thus the dollar is likely to be limited from rising against the Korean won,” Kiwoom Securities analyst Kim Yoo-mi said. “I believe the local currency will recover from a decline in its value and may rise to the range of 1,240 won to 1,250 won per dollar.”
Lee Da-eun, an analyst at Daishin Securities, said the won-dollar exchange rate will make a turnaround, although the won's gain against the dollar will “not be too much” due to investors' preference for safe-haven assets in a global economic recession.
In relation to the Korean stock market, Asian shares tracked Wall Street gains on Thursday after the Fed's rate hike and Powell's less-hawkish tone.
Experts said there will be some relief in investor sentiment in Seoul, too, when the KOSPI resumes Friday.
“The market can be said to be embracing the impact of the U.S. rate hike and tapering,” said Chung Yong-taek, the head of the research center at IBK Securities. “In that regard, the stock market is likely to see a relief rally or take a breather after taking a wild ride lately.”
Samsung Securities senior researcher Jeong Myung-ji speculated that KOSPI stocks are valued as low as they were during the global financial crisis in the 2000s and that the Fed's rate hike decision will have “little impact except for the stocks that are sensitive to interest rates.”
Meanwhile, the BOK is anticipated to raise its key interest rate again at its next monetary policy meeting, May 26, after increasing the rate to 1.50 percent, the highest level since July 2019, in mid-April.
In addition to curbing inflation, the BOK's decision was made in order to cope with the possibility of capital flight due to the Fed's faster-than-expected tapering and reversal in the interest gap between Korea and the U.S.
The May hike raises the U.S. interest rate to a range of 0.75 percent to 1 percent, and the aforementioned reversal can happen if the BOK takes no action against the Fed's additional rate hikes in the coming months.
Market observers expect the BOK will increase the base rate at least three times in the remaining year and that it will reach about 2.5 percent by the end of the year.