The won hit another decade-plus low Tuesday as the currency was battered by persistent rate worries and as decisive action to halt the rout was lacking.
It barreled through the 1,380-to-the-dollar mark and hit 1,388.40 intraday, a level not seen since it traded at 1,392 on April 1, 2009.
The fall came despite warnings the day before from the finance minister to those speculating against the currency or causing disturbances in the market and despite government assurances that it would work to stabilize the market.
Korean authorities have repeatedly tried to scare off investors betting on a weaker won and talk up the currency, but they have offered few indications that they have taken or will take and strong measures and have been vague on what can be done to stop the decline of the currency.
Earlier in the year, the administration said that a currency swap with the United States was not needed and made no public statements indicating that it has requested one.
The currency, which is down 21 percent over the past year, fell apart after Federal Reserve Chairman Jerome Powell reiterated his hawkish stance in late August and noted that containing inflation will come at a cost.
Slower growth and a weaker labor market “are the unfortunate costs of reducing inflation,” he said.
Following Powell’s remarks, Bank of Korea Gov. Rhee Chang-yong told Reuters that the Korean central bank is “not independent from the Fed,” suggesting that it would have to follow Powell’s lead.
Higher rates in the United States tend to attract capital to the higher yielding dollar assets and rattle currencies in economies where rates are lower.
The Fed’s rate-setting Federal Open Market Committee is holding a two-day meeting starting Sept. 20 to discuss monetary policy. The U.S. federal funds rate is currently in a range of 2.25 percent to 2.5 percent. The Bank of Korea’s base rate is 2.5 percent.
Rhee and the central bank have signalled that rates would be taken up a quarter point at a time, which would soon leave Korea with lower rates than the United States and leave it vulnerable to hot money outflows.
High debt in Korea makes it difficult to move much faster on rates and limits the central bank’s options. The housing market is already teetering and households are being squeezed by the higher interest costs, so a sudden increase of rates could hit the economy.
“The speed of the won decline is fast compared to our economy’s fundamentals,” said Lee Seung-heon, deputy governor, Bank of Korea. We will “closely monitor the trend of the foreign exchange market and actively try to stabilize the market.”
During the Asia financial crisis in 1997 and the global financial crisis in 2008, the won fell because of a shortage of foreign reserves and because of high foreign currency debt, said Ha In-hwan, an analyst at KB Securities, but this time, the fall is related to the trade deficit, which is not easily fixed through policy.
Korea has the ninth-largest foreign-currency reserves. Its trade and flow of funds picture is complex. The trade deficit hit $9.5 billion in August, the fifth consecutive month in the red.
Korea logged a current account surplus for the third straight month in July, but the surplus plunged as the good balance turned red for the first time in 10 years, according to the central bank data Wednesday.
The country logged a $1.09 billion current account surplus in July, down 86 percent on year. The current account balance in the first half was $25.87 billion, down 48 percent on year.
BY JIN MIN-JI [firstname.lastname@example.org]