Won-dollar rate soars to 1,409.7 on Fed rate hike

BOK chief hints at aggressive tightening

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.

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. 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.

The benchmark KOSPI also closed down 0.63 percent on Thursday, finishing at 2,332.31, while the techheavy 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.

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 Kwangho, 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.

Taking account of such market conditions, BOK Governor Rhee Chang-yong hinted at taking a more aggressive move next month.

“The premises for the BOK’s forward guidance of a 0.25 percentage point hike have changed a lot,” Rhee told reporters on Thursday, signaling 50-basis-point hike of the central bank’s key interest rate next month, instead of the previously expected 25 basis points.

WASHINGTON (Reuters) — Federal Reserve Chair Jerome Powell vowed on Wednesday that he and his fellow policymakers would “keep at” their battle to beat down inflation, as the U.S. central bank hiked interest rates by three-quarters of a percentage point for a third straight time and signaled that borrowing costs would keep rising this year.

In a sobering new set of projections, the Fed foresees its policy rate rising at a faster pace and to a higher level than expected, the economy slowing to a crawl, and unemployment rising to a degree historically associated with recessions.

Powell was blunt about the “pain” to come, citing rising joblessness and singling out the housing market, a persistent source of rising consumer inflation, as being likely in need of a “correction.”

Earlier on Wednesday, the National Association of Realtors reported that U.S. existing home sales dropped for a seventh straight month in August.

The United States has had a “red hot housing market … There was a big imbalance,” Powell said in a news conference after Fed policymakers unanimously agreed to raise the central bank’s benchmark overnight interest rate to a range of 3.00 percent-3.25 percent. “What we need is supply and demand to get better aligned … We probably in the housing market have to go through a correction to get back to that place.”

That theme, of a continuing mismatch between U.S. demand for goods and services and the ability of the country to produce or import them, ran through a briefing in which Powell stuck with the hawkish tone set during his remarks last month at the Jackson Hole central banking conference in Wyoming.

Recent inflation data has shown little to no improvement despite the Fed’s aggressive tightening — it also announced 75-basis-point rate hikes in June and July — and the labor market remains robust with wages increasing as well.

The federal funds rate projected for the end of this year signals another 1.25 percentage points in rate hikes to come in the Fed’s two remaining policy meetings in 2022, a level that implies another 75-basispoint increase in the offing. “The committee is strongly committed to returning inflation to its 2 percent objective,” the central bank’s rate-setting Federal Open Market Committee said in its policy statement after the end of a two-day policy meeting.

The Fed “anticipates that ongoing increases in the target range will be appropriate.”

Growth slowdown

The Fed’s target policy rate is now at its highest level since 2008 — and new projections show it rising to the 4.25 percent-4.50 percent range by the end of this year and ending 2023 at 4.50 percent-4.75 percent.

Powell said the indicated path of rates showed the Fed was “strongly resolved” to bring down inflation from the highest levels in four decades and that officials would “keep at it until the job is done” even at the risk of unemployment rising and growth slowing to a stall.

“We have got to get inflation behind us,” Powell told reporters. “I wish there were a painless way to do that. There isn’t.”

Inflation by the Fed’s preferred measure has been running at more than three times the central bank’s target. The new projections put it on a slow path back to 2 percent in 2025, an extended Fed battle to quell the highest bout of inflation since the 1980s, and one that potentially pushes the economy to the borderline of a recession.

The Fed said that “recent indicators point to modest growth in spending and production,” but the new projections put year-end economic growth for 2022 at 0.2 percent, rising to 1.2 percent in 2023, well below the economy’s potential. The unemployment rate, currently at 3.7 percent, is projected to rise to 3.8 percent this year and to 4.4 percent in 2023. That would be above the half-percentage-point rise in unemployment that has been associated with past recessions.

“The Fed was late to recognize inflation, late to start raising interest rates, and late to start unwinding bond purchases. They’ve been playing catch-up ever since. And they’re not done yet,” said Greg McBride, chief financial analyst at Bankrate.

U.S. stocks, already mired in a bear market over concerns about the Fed’s monetary policy tightening, ended the day sharply lower, with the SP 500 index skidding 1.8 percent.

In the U.S. Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year note vaulted over the 4 percent mark, their highest levels since 2007.

The dollar hit a fresh two-decade high against a basket of currencies, gaining more than 1 percent. The U.S. currency’s strength - it has appreciated by more than 16 percent on a year-to-date basis - has stoked concern at central banks around the world about potential exchange rate and other financial shocks.

Some are not even trying to match the Fed’s blistering pace of tightening, with the Bank of Japan on Thursday expected to hold fast to its ultra-easy policy and keep its policy rate at minus 0.1 percent, likely leaving it as the last major monetary policy authority in the world with a negative policy rate.