Korean won may dip below 1,300 per dollar if Fed takes 'giant step'

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Thu, December 1, 2022 | 01:46

Economy

Korean won may dip below 1,300 per dollar if Fed takes 'giant step'

Posted : 2022-06-14 16:50

Updated : 2022-06-15 16:45

Electronic signboards at Hana Bank in Seoul shows the benchmark Kospi fell 0.46 percent to 2,492.97, while the Korean currency closed at 1,286.4 per dollar, down 2.4 won from the previous close, Tuesday. Yonhap

Kospi falls below 2,500 for 1st time in 19 months

By Yi Whan-woo

The value of the Korean won is expected to fall below 1,300 per U.S. dollar for the first time in nearly 13 years, if the U.S. opts to take a "giant step" by raising its benchmark rate by three-quarters of a percentage point during the U.S. Federal Reserve's rate-setting meeting scheduled to be held from Tuesday to Wednesday (local time), according to market analysts.

The speculation comes as the Korean currency is losing ground fast against the greenback and at one point, breached the 1,290 won during the intraday trading session Tuesday, after U.S. monthly inflation hit a new 40-year high of 8.6 percent ― in government data ― released on Friday.

The local currency closed at 1,286.4 per dollar, down 2.4 won from Monday's close. It fell to 1,292.5 won during the intraday trading session, which was lower than this year's previous lowest figure of 1,291.5 won on May 12.

"The worst is yet to come, because the won-dollar exchange rate may reach the 1,300 level depending on the Fed meeting this week," said Park Chong-hoon, the head of economic research at Standard Chartered Bank Korea.

The won-dollar exchange last reached the 1,300 won level on July 13, 2009, when it ended at 1,315 won.

Park noted the 8.6 percent inflation rate goes against the belief that U.S. inflation has peaked, and thus can prompt the Fed to hike the policy rate by 75 basis points, instead of 50 basis points, as it signaled, following its latest rate-setting meeting back in May.

A possible three-quarter percentage point rate increase can bring the benchmark interest rate of the U.S. equal to the level of that in Korea at 1.75 percent.

Park speculated that the Fed can approve another 0.75 percentage point rate rise in July if inflation does not let up.

The envisioned scenario possibly means a reversal of the interest rate gap between Korea and the U.S., which is feared could spark a massive outflow of foreign capital in search of safe haven assets.

For instance, the benchmark Kospi has been taking a beating this year in general, over the foreigners' selling spree. On Tuesday, it extended its losing streak and closed at its 19-month low of 2,492.97, down 0.46 percent from a day earlier.

Shinhan Bank analyst Baek Suk-hyun added to the speculation that the Korean won may decline to the 1,300 won level against the U.S. dollar.

"The dollar is strengthening against virtually all other currencies," he said. "The fact that the won-dollar exchange rate neared the 1,290 won level reflects anxiety over looming U.S. rate hikes and the exchange rate can certainly breach the 1,300 level depending on the Fed's decision."

The analysts forecast that the Korean won might see a steeper fall, considering the door remains open for higher U.S. inflation due to soaring prices of energy and food in large part caused by the war in Ukraine.

In Korea, the country's current account posted its first deficit in 2 years in April, and concerns are growing over whether such a shortfall will continue the won's depreciation amid rising import prices.

Asked whether the foreign exchange authorities' intervention would placate the won's excessive volatility, the experts remained skeptical.

"It may help in adjusting the pace of the won's depreciation, but not so in preventing it from breaching the unwanted level," Park said.

Meritz Securities analyst Yoon Yeo-sam voiced a similar opinion, saying, "Tackling the won's depreciation can be possible only when U.S. inflation eases to some extent, and in that regard, the interventionist comment is unlikely to help the local currency to bounce back for the time being."

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