As the U.S. Federal Reserve (Fed) carried out the ‘baby step’ by raising the base rate by 0.25 percentage points, the interest rate gap between Korea and the United States widened to 1.75 percentage points, the largest ever. At the same time, Fed Chairman Jerome Powell hinted at suspending further rate hikes in the future.
At the regular meeting of the Federal Open Market Committee (FOMC) held on the 3rd (local time), the Fed raised the base rate by 0.25 percentage point from the previous 4.75-5.0% to 5.0-5.25%. Accordingly, the Fed has raised interest rates 10 times in a row since March last year, raising the US benchmark interest rate to its highest level since August 2007. The interest rate gap with Korea widened to a record high of 1.75 percentage points.
The FOMC decided to raise interest rates by ‘unanimous vote’ on this day and hinted at the end of the rate hike cycle through a statement. In this statement, the FOMC deleted the phrase “additional policy strengthening (an interest rate hike) is expected to be appropriate,” which was included at the time in March.
Fed Chairman Jerome Powell said at a press conference following the FOMC that the deleted phrase was “quite meaningful” and that, “given the uncertain headwinds and accumulated monetary tightening, future policy will depend on how the situation develops.” .
Last week, the won-dollar exchange rate exceeded 1,340 won for the first time in five months due to the preference for safe assets due to financial unrest caused by US banks and concerns about the widening interest rate gap between Korea and the US due to additional interest rate hikes by the Federal Reserve. According to Seoul Foreign Exchange Brokerage, the won-dollar exchange rate exceeded 1,340 won during intraday on the 26th, exceeding 1,340 won for the first time in five months since November 29 last year (1,342.0 won) based on intraday highs.
However, with Chairman Powell’s dovish remarks (preferring monetary policy easing), the prevailing view in the market is that the downward pressure on the won-dollar exchange rate will intensify.
Moon Hong-cheol, a researcher at DB Financial Investment, said, “In the first half of the year, we do not know how the US debt ceiling negotiations will turn out, so the upward volatility is likely to be a bit high, and in the second half, the Fed’s interest rate cut is looking at the annual low at around 1,200 won.”
The U.S. federal government debt reached the statutory limit ($31.4 trillion, about 4.8 trillion won) in January. Already, the U.S. government is buying time through special measures such as deferment of new public servant pension payments. However, the U.S. Treasury Department’s judgment is that if Congress does not raise the debt ceiling, it could fall into default on the 1st of next month. While the Joe Biden administration urges the role of Congress, it adheres to the position of “no negotiations” regarding the spending cuts demanded by the opposition party.
Seo Sang-young, a researcher at Mirae Asset Securities, said, “Chairman Powell hinted at an interest rate freeze, so the dollar will weaken and the won will strengthen.” At the same time, he pointed out, “However, considering that the indicator that the US Consumer Price Index (CPI) will be announced next week will not be good, the value of the won is not high.”
Some experts emphasized that factors that continue to weaken the won include changes in the supply chain caused by the US-China conflict, continued trade deficit, and deterioration in the current account balance. The trade balance recorded a deficit for 14 months until last month as exports of semiconductors, which had been driving the Korean economy, plummeted despite favorable exports of automobiles and shipbuilding.
Hwang Se-woon, a senior researcher at the Capital Market Institute, predicted that the related point would not exceed 1,350 won. Senior Research Fellow Hwang said, “The dollar’s strength seems to have already ended, but the problem is that the won is weakening further than this.”
He added, “As the conflict between the US and China intensifies, South Korea could be the biggest victim of this, and the trend of trade and current account deficits is solidifying. This situation raises concerns about the health and safety of the Korean economy.”
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.