The value of the won continues to plummet as investors flock to the dollar as a safe haven currency amid lingering market uncertainties.
Korea’s local currency closed at 1,349.3 won against the dollar Wednesday, down 0.8 won from the previous session’s close. It tumbled to 1,356 won during intraday trading hours before closing at the lowest point since Aug. 29 last year.
Analysts say the dollar gaining power on top of market uncertainties accelerated the decline, adding a burden on the Korean economy already under the pressure of high interest rates and high oil prices.
“There is a low possibility of additional [U.S.] rate hikes but the extended period of high rates can boost the preference for safe assets globally,” Hi Investment & Securities analyst Park Sang-hyun said.
The won showed signs of solidifying its ground against the dollar in June and July, remaining above 1,300 won for most of the two-month period, but turned feeble again in early August from market volatility spurred by the historic U.S. credit rating downgrade by Fitch Ratings two days before.
The dollar index, a gauge of the greenback’s value relative to six major foreign currencies — euro, franc, yen, pound, krona and the Canadian dollar — hit a 10-month high Tuesday at 106.21.
Park also noted that rising U.S. Treasury bonds may repeat the 2013 taper tantrum, referring to a period when emerging nations’ currencies, bonds and stocks plunge on surging U.S. treasury yields.
The U.S. central bank kept its benchmark interest rate steady earlier in the month but signaled another rate hike coming in one of the two rate-setting meetings left this year.
“We would have to push the federal funds rate higher, potentially meaningfully higher, [to bring inflation down to target range],” Minneapolis Federal Reserve President Neel Kashkari said in an essay posted Tuesday.
He said the U.S. economy is heading for a “high-pressure equilibrium.”
“Today I put a 40 percent probability on this [rate hike] scenario,” Kashkari added, noting that the Fed is still more likely to maintain its “soft-landing” goal.
Kashkari is widely known to be one of the more dovish members of the central bank.
U.S. policymakers also hinted at slower rate cuts for coming years than previously expected.
They expected the benchmark rate to stay between 5 percent and 5.25 percent by 2024-end, up from the 4.6 percent forecast released in June.
The U.S. government on the brink of a shutdown further dampened market sentiment, prompting more market players to turn to the dollar as a safe haven.
The Congress, divided over the Senate’s bipartisan push involving aid to Ukraine and natural disasters, is stuck in a federal budgetary standoff with a Saturday deadline.
U.S. media reports overnight said the Senate has unveiled a stopgap proposal to keep the government running through Nov. 17 but the bill is expected to face fierce opposition from the Republican-dominant House of Representatives.
BY SOHN DONG-JOO [email@example.com]