Won-dollar exchange rate tops 1,350 after US Fed hints at rate hikes

Posted on : 2022-08-30 17:14 KST Modified on : 2022-08-30 17:14 KST
Comments by US Fed Chair Jerome Powell at Jackson Hole roiled Korean markets
Monitors in the KEB Hana Bank dealing room in downtown Seoul show the KOSPI and won-dollar exchange rate on Aug. 29. (Kim Bong-gyu/The Hankyoreh)
Monitors in the KEB Hana Bank dealing room in downtown Seoul show the KOSPI and won-dollar exchange rate on Aug. 29. (Kim Bong-gyu/The Hankyoreh)

In the wake of US Federal Reserve Chair Jerome Powell’s hawkish monetary policy remarks at the Jackson Hole conference on Friday, the won-dollar exchange rate surpassed the 1,350-won mark while the KOSPI plummeted by more than 2%.

South Korean foreign exchange authorities intervened both verbally and directly, but their efforts were not enough to stop the exchange rate from soaring.

On Monday, the won-to-dollar exchange rate closed at 1,350.40 won, up 19.10 won from the previous trading day. This marks the highest rise in the exchange rate in 13 years and 4 months, when the won hit the 1,356.80 mark on April 28, 2009, due to the global financial crisis.

As a result of Powell’s remarks, the US dollar’s value was further strengthened and the won-dollar exchange rate opened at 1,342.50 won on Monday, up 11.20 won compared to the previous trading day. With the dollar strong, the won-dollar exchange rate was able to surpass the 1,350-won mark later that day. The highest recorded rate of the day was 1,350.80 won.

Meanwhile, the KOSPI closed at 2,426.89 points, down 2.18% (54.14 points) from the previous trading day. Similarly, the KOSDAQ closed at 779.89 points, down 2.81% (22.56 points).

South Korean bond markets were also affected. The yield on three-year government bonds rose by 0.128% compared to the previous day. By the end of the day, bond yields stood at 3.653% per year.

Powell’s hawkish remarks made at the Jackson Hole annual economic symposium in Wyoming dealt a strong blow to South Korea’s foreign exchange and financial markets.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said in his speech.

The value of the US dollar, which is considered the “last safe asset,” has been soaring in anticipation of further monetary policy tightening measures.

The dollar index, which shows the value of the dollar against the currencies of six major countries such as the euro, yen and pound, also rose to 109 points on Monday. This marks its highest level in 20 years since June 2002, when it stood at 109.63.

South Korea’s foreign exchange authorities are believed to have begun with verbal intervention in the morning but switched to a more direct form of intervention in the afternoon by mobilizing foreign exchange reserves, such as by selling US dollars in their possession.

Despite their best efforts, however, the rise in the won-dollar exchange rate has not slowed down.

First Vice Finance Minister Bang Ki-sun held a meeting to review the current market situation and said that the government would “strengthen policy efforts to stabilize the markets” in the case of excessive herd behavior in the market.

As volatility in the foreign exchange market grew, the government began to support foreign currency financing.

“We will actively support foreign currency procurement at the private level by utilizing overseas government bonds held by domestic financial companies,” Lee Bok-hyun, head of the Financial Supervisory Service, said at a financial market review meeting.

No-action letters started being issued to domestic financial companies starting Monday.

The hope is that after borrowing foreign assets held by domestic insurance companies, such as US Treasury bonds, South Korean banks will more easily be able to acquire dollars in foreign markets using these assets as collateral.

By Jun Seul-gi, staff reporter

Please direct questions or comments to [english@hani.co.kr]

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