Won Approaches W1,400 Against Dollar

  • By Kim Shin-young, Jeong Si-haeng, Shon Jin-seok

    September 15, 2022 09:50

    Expectations of more rate hikes by the U.S. Federal Reserve sent the Korean won tumbling close to the W1,400 level against the dollar on Wednesday.
    Fears spread that U.S. inflation, which soared to the highest level in 41 years, could drag on longer than expected, forcing the won down W17.3 to close at W1,390.9.
    The won remained in the upper W1,100 range until the end of February this year, but the rapid pace of interest hikes by the Fed caused it to weaken in March. The exchange rate surpassed W1,300 in June. This is the third-strongest currency shock Korea has experienced since the 1997 Asian financial crisis (W1,962 per dollar) and the 2008 global financial crisis (W1,570).
    The government and the Bank of Korea stressed that the euro, Japanese yen and British pound have also fallen against the greenback due to global inflation and the Fed's rate hikes. But the Japanese government appears to be letting the yen plummet in order to prop up the country's economy, while the eurozone, U.K. and Japan have all forged currency swap deals with the U.S. and their currencies are widely traded internationally.
    Korea's cumulative trade deficit reached $27.5 billion as of Sept. 10, already surpassing the previous record of $20.6 billion set in 1996. The country will have been six straight months in the red at the end of September for the first time in 25 years, and the won is only likely to strengthen if the trade balance improves and leads to an influx of dollars.
    The main causes of Korea's trade deficit are rising costs of imported fuel and raw materials, but experts also point out structural risks, including worsening trade exacerbated by declining exports to China, which is the biggest market for Korean products.
    The stock market slump here is also dragging on, while real estate prices plummeted, raising concerns of a protracted slump.
    Corporate earnings are also floundering. According to the Bank of Korea, the operating margins of Korean companies fell from 7.4 percent a year ago to 7.1 percent in the second quarter, while their debt-to-equity ratio rose from 86.6 percent to 91.2 percent over the period.
    An electronic board shows the Korean won closing at 1,390.90 against the U.S. dollar at KB Bank headquarters in Seoul on Wednesday. /News1
    The BOK faces an increasing dilemma ahead of its next rate-setting meeting on Oct. 12. The Fed raised the key rate by 0.75 percentage point in June and July to tame inflation, raising the benchmark rate to 2.25-2.5 percent. But the effects have been minimal so far and may lead to more aggressive hikes.
    Harvard University economist Larry Summers tweeted on Tuesday, "I don't think there is any substantial probability in the U.S. that this episode [of inflation] can be managed without rates being raised to close to four percent."
    But raising the base rate here further could add fuel to fire as Korea shoulders close to W1.87 quadrillion worth of household debt. The move would also rattle the stock market and trigger an exodus of foreign capital.
    Shin Kwan-ho at Korea University said, "There is a low chance of an economic crisis similar to the Asian financial crisis, but the household debt could worsen due to the Fed's rate hikes and cause more difficulties for the Korean economy." Shin voiced particular concerns for people in their 20 and 30s, who borrowed heavily to buy homes.
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