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| Electronic signboards at a dealing room of Hana Bank in Seoul shows the benchmark KOSPI fell 1.81 percent to 2,290, while the Korean currency closed at 1,409.3 per dollar, up 0.4 won from the previous close, Friday. Yonhap |
By Yi Whan-woo
The Korean currency may sink as low as 1,500 won per dollar by the end of 2022 due to growing volatility triggered by U.S. rate hikes, after plummeting below the 13-year low of 1,400 won, Thursday, according to analysts, Sunday.
The breach of the 1,400 won level, which was viewed as a psychological threshold, was attributed to the third straight "giant step" rate hike of 75 basis points by the U.S. Federal Reserve, Wednesday, to tame inflation that still remains far above its 2-percent annual target. The U.S. benchmark interest rate accordingly was raised to a range of 3 percent to 3.25 percent.
In the wake of the Fed's aggressive tightening, the Korean currency slid 15.5 won from the previous trading session and closed at 1,409.7 won per dollar, Thursday, marking the lowest level since March 20, 2009, when it closed at 1,412.5 won. It slightly rebounded and closed at 1,409.3 won, Friday.
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Under the circumstances, analysts pointed out the latest median projection for the U.S. policy rate by the year-end is 4.4 percent. The Fed has two remaining rate-setting meetings this year in November and December.
"The aftermath of the Fed's 75-basis-point hike was reflected on the currency market in Korea, Thursday, but the Fed's possible steep hikes with reference to the media projection have yet to be reflected," said Lee Mi-sun, an analyst at Hana Financial Investment. "The market thus should embrace the possibility of the won falling to a range between 1,450 and 1,500 per dollar."
Lee expects the won to continue to lose ground against the dollar for a while, because the interest rates of the two countries could widen further and that capital flight among foreign investors can be accelerated. The U.S. interest rate outpaces Korea's 2.5 percent following the Fed's rate hike last week.
Kim Seung-hyuk, a researcher at NH Futures, said the dollar can get stronger considering the value of the key currencies, such the euro and the British pound, are declining versus the greenback in the midst of a prolonged war between Russia and Ukraine.
"The Ukraine crisis is adding to the woes of the European economy with winter approaching and the supply of energy from Russia getting tight," he said. "The persistently strong dollar will put further pressure on the Korean currency and it may fall to the range of between 1,450 and 1,500 per dollar by the year-end."
Ha Joong-kyung, a Hanyang University economics professor, said uncertainties over global oil prices, a months-long trade deficit in Korea and other economic risks in Korea and abroad can speed up the won's freefall.
In a bid to minimize shock from the Fed's faster-than-expected rate hike, Bank of Korea (BOK) Governor Rhee Chang-yong hinted at a shift in the BOK's small, incremental rate hike policy with two more rate-setting meeting to come in October and November.
Rhee said the preconditions for the BOK's conventional 25-basis-point hike "have changed much," stressing that the BOK "is responsible to gauge the impact of the currency exchange rate on prices and what policy it has to take."
Meanwhile, the BOK and the National Pension Service (NPS) agreed last week to open a temporary dollar-for-won currency swap line in a bid to ease demand for dollars in the domestic foreign exchange market.
The swap deal is expected to be signed officially next month and will remain open until the end of this year.
It will allow the state pension fund to borrow up to $10 billion from foreign reserves held by the BOK, to divert demand from the NPS for dollars in the local spot market that has gone through heightened volatility in recent months.
In a TV interview, Sunday, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said the Korean and the U.S. financial authorities agreed to closely monitor the currency market and implement "liquidity facilities" if necessary.
Asked about a possible currency swap deal between the two allies, Choo viewed Korea's foreign reserves is not "at a worrisome level" and therefore "It is too early to implement such deal at the current stage."
