Won falls in value to 15-year low on hawkish Fed cut, strong dollar

 

By Lee Kyung-min

• Published Dec 19, 2024 4:51 PM KST
• Updated Dec 20, 2024 10:26 PM KST

The Korean currency sank to below 1,450 won against the U.S. dollar, buffeted by market expectation of a sustained strength in the U.S. currency after the U.S. Federal Reserve (Fed) delivered a hawkish 25 basis point cut, market watchers said Thursday.

Some say the Korean currency could plunge further to 1,500 won, weakened by slowing pace of Fed easing, the resulting dominance of the global reserve currency and upticks in U.S. Treasury yields.

According to the financial market data, the Korean won opened at 1,453.0 won, 17.5 won weaker from the previous session. It closed at 1,451.9 won against the dollar.

This was the first time for the rate to surpass 1,450 won since March 2009 at the height of the global financial crisis.

Thursday’s development surpassed the 2022 short-term market turmoil whereby the currency sank to 1,444.2 won in the midst of Legoland liquidity crunch.

The 1,450 won is a further loss in value since the overnight plunge of 1,444 won early this month, hours after President Yoon Suk Yeol’s martial law declaration.
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“The currency is likely to sink further,” said Standard Chartered Bank Korea senior investment strategist Hong Dong-hee.

“The Fed easing path was essentially the only factor largely insulated from wild market speculations. However, the overnight decision sent waves of adjustments in expectations," he said, pointing to the Fed chair expressing cautious approach toward further pace of easing.

“I think we're in a good place, but I think from here it's a new phase and we're going to be cautious about further cuts," Jerome Powell said at a press conference after the Fed's two-day policy meeting, Thursday, (local time).

The hawkish tone upended market consensus that the policy easing will have a total of 100 basis point cut throughout next year.

The Bank of Korea's (BOK) will face daunting rate choices at the January monetary policy board meeting, complicated by the currency market developments emerging as a deterrent to further rapid easing, depiste weak domestic spending and tempered inflation.

Further propelling the pessimism are greater dollar demands depreciating the Korean won, illustrative of waning overall investor sentiment brought on and amplified by President Yoon Suk Yeol’s botched attempt to declare martial law.

Also unfavorable are limited government fiscal headroom due to budget cuts. This is unlikely to catalyze prolonged anemic domestic spending amid dimming prospects for the country’s economy with export growth losing steam.

Policy priorities of the second Trump administration remains another factor advancing the grim assessment.

“Financial market conditions are exposed to greater-than-thought volatilities. The political uncertainties within the country as well as trade and tariff factors will continue to weigh on the investor risk appetite and behavior," Hong said.

Shinhan Bank and KB Kookmin Bank economists say the Korean currency will fluctuate between 1,460 won and 1,470 won against the dollar.

Woori Bank's economist views the won could weaken sharply beyond 1,500 won, coinciding with Trump's inauguration.

Meanwhile, financial authorities have postponed the implementation of a stress buffer capital requirement until the second half of next year, as part of wider efforts to assist banks and financial institutions to more effectively manage potential liquidity crises.

A stress buffer capital requirement refers to extra cash that banks must possess to withstand economic downturns or financial crises.

Foreign exchange authorities and the National Pension Service have also agreed to increase the ceiling for the currency swap arrangement by $15 billion, to help stabilize the foreign exchange market.

The main KOSPI bourse ended at 2,435.93 points, down 1.95 percent from the previous session.