Will Korean won continue to gain ground against US dollar?

By Yi Whan-woo

With the Korean won bouncing back against the U.S. dollar, there is growing attention to whether the local currency will continue to gain ground against the greenback, on the back of a string of events this week in the United States and China that raise hope for relief from U.S. inflation as well as the dollar's decline.

The won has remained at the 1,400-won level for more than a month, adding to concerns over economic turmoil in Korea, as this level has only been observed twice before: during the 1997-1998 Asian financial crisis and the 2008-2009 global financial crisis.

Under these circumstances, the Korean currency gained strength against the greenback for the second trading session, Tuesday.

The won-dollar exchange rate ended at 1,384.9 won, down 16.3 won from a day earlier after opening at 1,394.5 won and remaining below 1,400 won throughout the session.

U.S. President Joe Biden, right, shakes hands with Maryland Democratic gubernatorial candidate Wes Moore during a rally for the Democratic Party on the eve of mid-term election day at Bowie State University in Bowie, Maryland, Monday. EPA-Yonhap

Analysts said that the won's ascent can be attributed to the U.S. midterm elections, Tuesday, in which the Republicans could make gains in the House of Representatives.

The possible gains could mean a curb on the Joe Biden administration's spending, which ―while strengthening the safety net for low-income groups, pandemic-related support and investments in infrastructure ― has been criticized by Republicans for fanning inflation that reached four-decade high of 9.1 percent in June.

U.S. inflation has shown no signs of cooling and has remained above market forecasts, with 8.5 percent in July, 8.3 percent in August and 8.2 percent in September.

U.S. inflation in October, which is scheduled to be announced Thursday, is anticipated to slip to 7.9 percent.

“A 7-percent-range inflation can be perceived as an optimistic sign,” a Seoul economist said on condition of anonymity, adding, “It may allow the U.S. Federal Reserve to take a breather on its aggressive credit tightening in its next rate-setting meeting.”

The economist was referring to the Fed's December rate-setting meeting from Dec. 13 to 14, which takes into account the October inflation rate in the decision-making process.

The Fed delivered the fourth 75-basis-point hike so far this year, raising the once near-zero base rate to the range of 3.75 percent to 4 percent as of November.

While the Fed's rate hike added to the persistently strong dollar, some believe that China could be gearing up to shift away from its zero-COVID policies, so in return, it is drawing the attention of investors who prefer safer haven assets such as the U.S. dollar.

“The market speculates that the Chinese government will find it tough to maintain its lockdown policies, so that is likely to lead to a fall in the dollar's value,” said Kim Seung-hyuk, a researcher at NH Futures.