Fed chair designation renews fears of won weakening

An electronic board shows KOSPI closing at 4,949.67 points, down 5.26 percent from the previous session, while the tech-heavy Kosdaq closed at 1,098.36 points, down 4.44 percent, at Hana Bank in Seoul. The Korean currency closed at 1,464.3 won against the dollar as of 3:30 p.m. Yonhap

Fears of renewed weakness in the Korean won against the U.S. dollar are growing, amplified by the dollar strengthening and foreign investors dumping Korean stocks, market analysts said Monday.

Fueling the won's weakness was the designation of Kevin Warsh, a former Federal Reserve governor, as the next chair of the U.S. central bank.

He was considered “less dovish” than other Fed candidates, a view that pushed up the value of the dollar. He was long known for his hawkish stance, but since last year voiced support for monetary easing, citing productivity gains from artificial intelligence (AI).

A dovish Fed would in theory give the Bank of Korea (BOK) room to maneuver, since the interest rate differential of 1.25 percentage points between the two would be narrowed.

This would reduce risk of capital outflow, partially stabilizing the Korean currency. In case of a prolonged economic slowdown in the coming quarters, the central bank would then be able to cut rates without fear of currency depreciation.

“The recent won weakening is driven by overall strength in the global reserve currency, coupled with market sentiment against heightened risks,” Standard Chartered Bank Korea strategist Hong Dong-hee said.

The Korean currency approached 1,460 won per dollar as of noon, losing about 20 won from the previous session’s close of 1,439.5 won. The won closed at 1,464.3 as of 3:30 p.m., losing 24.8 won from the previous session.

“For the time being, the currency is likely to face weakening pressure due to market uncertainties. Expectations of a rate cut and U.S. balance sheet reduction are both there. But the market apparently took the latter as a more significant factor. However, if the Fed eases later on, the narrowed rate differential between two countries will stabilize the Korean currency in the long term,” Hong said.

This view on growing risk-off sentiment is also evidenced by gold and silver prices crashing by near-double digits.

International gold and silver prices plunged 9.5 percent on Friday (local time), less than a week after gold reached record highs of $5,500 per ounce.

Silver fell far harder. Spot silver plunged to around $83, down more than 27 percent from the previous session.

Similarily, the Korean stock market took a heavy blow Monday.

The Korea Exchange (KRX) activated a “sidecar” measure on the benchmark KOSPI after the Fed chair designation triggered a sudden foreign selloff amid reduced risk appetite.

The measure was put in place at 12:31 p.m., temporarily halting program sell orders, as KOSPI fell more than 4 percent and KOSPI 200 futures fell more than 5 percent. The tech-heavy secondary bourse Kosdaq also fell more than 4 percent.

The KOSPI closed at 4,949.67 points, down 5.26 percent from the previous session, while the tech-heavy Kosdaq closed at 1,098.36 points, down 4.44 percent.

KOSPI saw a net foreign selloff of over 2 trillion won ($1.37 billion).

Warsh was classified as a hawk during his tenure as a Fed governor, but has since shifted stance, according to Korea Center for International Finance researcher Kwon Hyuk-woo.

Warsh recently said during an interview with FOX News, “The Fed should shrink its balance sheet to redeploy that money to Main Street so that Main Street can have the strong economy that we’re seeing in the financial markets.”

He also said that the Fed “can lower interest rates a lot, and in so doing get 30-year fixed rate mortgages affordable, so we can get the housing market to get going again.”