Won's sharp depreciation feared to accelerate capital outflow
By Yi Whan-woo
The Korean won is feared to keep losing value against the greenback and the won-dollar rate may rise above 1,300 won per dollar, according to analysts, Friday.
They said persistently high inflation in the United States is likely to further drive faster-than-expected U.S. Federal Reserve tapering, thereby increasing global economic uncertainty, despite the Fed's less hawkish tone, which some expected in its latest rate-setting meeting, May 4.
A rapidly weakening Chinese currency is increasing uncertainty as well, along with Beijing's growth slowdown and the ongoing war in Ukraine, which is causing investors to increasingly look for safe haven assets.
While the Korean currency gained 4.4 won to close at 1,284.2 won against the dollar, Friday, it retreated to 1,288.6 won a day earlier ― the weakest level since July 14, 2009, when it ended at 1,293 won.
|President Yoon Suk-yeol sits between Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, left in the back, and Bank of Korea Governor Rhee Chang-yong, third from left in the back, during a meeting on macroeconomic issues at Korea Center for International Finance, in Seoul, Friday. Yonhap|
"Under the circumstances, the won-dollar exchange rate is likely to reach the 1,300 won level in the short term," said Park Chong-hoon, the head of economic research at Standard Chartered Bank Korea.
He pointed out that U.S. inflation shows no sign of leveling off, as can be seen, due to its consumer prices hitting 8.3 percent in April compared to last year in data released by the Bureau of Labor Statistics, Wednesday.
April's inflation slowed down after seven months of gains. It still outstripped forecasts, fueling speculation that it will keep the Fed on the path of aggressive interest rate hikes in its fight against a 40-year high in inflation.
Following a half-percentage-point increase in the U.S. interest rate, Fed Chairman Jerome Powell hinted at multiple 50-basis point rate hikes ahead though likely nothing more aggressive than that.
"But it does not mean uncertainties associated with the U.S base rate have been removed," Park said. "In that regard, it can be said that the preference of the dollar over the Korean won may last until the Fed's upcoming rate-setting meetings in June and July," he added.
Hana Bank researcher Seo Jung-hoon voiced a similar view, saying, "The turbulence in the foreign exchange market is expected to last at least for the next one month and the won-dollar exchange rate may hover around the 1,300 won level."
Seo assessed that the Korean won's depreciation ― apart from the U.S. factor ― is also worsened by concerns over the lockdown in China which is affecting growth and weakening sentiment regarding the Chinese yuan.
For instance, the yuan touched a one-and-half year-low against the dollar on May 6.
Such a trend may lead to capital flight in China, a big minus for Korea given that the country remains the largest trading partner for the latter.
Analysts view the weakening won will likely accelerate the outflow of foreign capital as well as a rise in import prices.
According to the Bank of Korea (BOK), net foreign money outflows from both the main bourse Kospi and secondary Kosdaq markets came to $4.26 billion in April.
This marked the third straight month of foreign capital outflow in the stock market, including $1.86 billion in February and $3.93 billion in March.
The import price index dropped for the first time in April, falling 0.9 percent from a month earlier, over a decline in international oil prices. But concerns remain that a spike in oil prices can happen again at any time due to the energy crunch which is intensified by the Russia-Ukraine war.
Against this backdrop, President Yoon Suk-yeol called for a preemptive response to the country's economic challenges during his first meeting on macroeconomic issues with economic experts and government officials after taking office, Tuesday.
The meeting was attended by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho and BOK Governor Rhee Chang-yong.