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| Bank of Korea Governor Rhee Chang-yong, second from left, sits next to Financial Supervisory Service (FSS) Governor Lee Bok-hyun, first from left, finance minister Choo Kyung-ho, third from left, and Financial Services Commission (FSC) Chairman Kim Joo-kyun, first from right, during a press conference after an emergency macroeconomic meeting in central Seoul, Thursday. Yonhap |
BOK chief hints at more aggressive tightening
By Anna J. Park
The Korean won to U.S. dollar exchange rate soared above the 1,400 level for the first time in more than 13 years on Thursday in the wake of the U.S. Federal Reserve's overnight hike of its key interest rate by 75 basis points for the third straight time.
With the U.S. Fed's hawkish attempt to curb inflation, the won-dollar exchange rate soared, ending at 1,409.7 won at the Seoul foreign currency exchange on Thursday. It marked a 15.5 won increase from Wednesday.
The rate started off at 1,398 won, a 3.8 won increase from the previous close, and quickly surpassed the 1,400 won mark in the early trading hours of Thursday. It reached 1,413 at one point during the trading session.
This is the first time that the won-dollar exchange rate exceeded the 1,400 won mark since March of 2009, when it hit 1,422 during the global financial crisis. Besides the global financial crisis of the late 2000s, the won-dollar exchange rate exceeded the 1,400 won mark during the Asian financial crisis in the late 1990s.
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The benchmark KOSPI also closed down 0.63 percent on Thursday, finishing at 2,332.31, while the tech-heavy Kosdaq dropped 0.46 percent to finish at 751.41.
On Wednesday, local time, the U.S. Fed raised the key interest rate by 75 basis points for the third time in a row to 3.25 percent, the highest level since early 2008. The Fed is expected to raise it further by 1.25 percentage points by the end of the year in a fight against inflation.
"We're committed to getting inflation back down to 2 percent," U.S. Fed Chairman Jerome Powell told reporters on Wednesday. "The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer," he stressed.
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Now that the U.S.' benchmark rate has hit the range of 3.0-3.25 percent, Korea's current key interest rate of 2.5 percent falls way below that of the U.S., worsening market forecasts regarding the direction of the won-dollar exchange rate in the near future.
Korea Economic Research Institute (KERI) forecasts the won-dollar exchange rate to reach as high as 1,434 won, which is 22.4 percent higher than that of late last year, if the Bank of Korea (BOK) raises its key interest rate by 25 basis points in October. In case the BOK takes a big step of raising it by 50 basis points next month, the won-dollar exchange rate would reach 1,410 won.
"Since the private sector is financially vulnerable to soaring interest rates, the BOK would have difficulty in keeping up with the speed of the U.S. Fed's interest rate hike. Thus, the government needs to take foreign exchange market stabilization measures immediately to reduce mounting pressure that pushes the won-dollar exchange rate upward," Choo Kwang-ho, research head at KERI, said.
Market experts say the dollar's strengthening against the won as well as the bearishness of local stock markets will be unavoidable for the time being.
"The U.S. Fed might slow down its pace of interest rate hikes no earlier than around December, after seeing the inflation rate in the months of October and November," Yun So-jung, an analyst at Korea Investment & Securities, pointed out.
"Due to the pressure from the U.S. tightening of monetary policies, the dollar's strengthening against the won is expected to continue, while local stock markets will remain bearish amid weakened external financial factors," Yoon Yeo-sam, analyst at Meritz Securities, said.
Taking account of such market conditions, BOK Governor Rhee Chang-yong hinted at taking a more aggressive move next month. Back in July, Rhee said a gradual increase in the key interest rate would be desirable for the time being.
"The premises for the BOK's forward guidance of a 0.25 percentage point hike have changed a lot," Rhee told reporters on Thursday morning, signaling 50-basis-point hike of the central bank's key interest rate next month, instead of the previously expected 25 basis points.
Meanwhile, Finance Minister Choo Kyung-ho warned that a high level of uncertainty is likely to continue for a while due to the accelerated fiscal tightening by the U.S. and European countries. The minister said that the government will take necessary market stabilization measures in a timely manner.
