South Korea said it was reviewing “contingency plans” to tackle foreign exchange volatility, with the Korean won hovering at a 13-year low against the US dollar as currencies across Asia come under pressure from an increasingly hawkish Federal Reserve.
Finance minister Choo Kyung-ho stepped up verbal intervention on Thursday to try to stem an acute sell-off in the Korean currency, saying authorities would take necessary measures if there was excessive volatility.
“The exchange rate is rising too fast and people are concerned about this. So we are closely monitoring the market situation,” he told a session of parliament. “We are staying on alert and reviewing various contingency plans through inter-ministry discussions.”
The Korean won extended losses on Thursday, falling to Won1,393.7 against the dollar, its lowest level since March 2009. The currency of the export-driven economy has weakened 17 per cent against the dollar this year.
The Bank of Korea warned this month that the won’s recent fall had been too fast relative to the country’s economic fundamentals. The central bank raised its policy rate in August by a quarter point to 2.5 per cent and signalled more tightening to counter the won’s weakness.
Analysts expected the Korean currency to continue its descent until the end of this year, dragged down by the Federal Reserve’s aggressive monetary tightening and Seoul’s ballooning trade deficits.
“Asian currencies, including the won, will remain under pressure for the time being as the Fed continues its outsized rate hikes while Japan maintains its loose stance, China is cutting rates and South Korea is not raising rates as much as the US,” said Hwang Se-woon, a researcher at Korea Capital Market Institute. “But the won is likely to fall further, although its pace is unlikely to be as rapid as the yen’s or yuan’s.”
The weaker won has heightened inflationary pressure by increasing import costs, as Asia’s fourth-largest economy relies heavily on energy imports. South Korea’s inflation rate slowed to 5.7 per cent in August from 6.3 per cent in July, a 24-year high.
But the finance minister has forecast South Korean inflation to peak in October. The country reported a record trade deficit of $9.47bn in August as export growth slowed while higher prices of oil and other commodities inflated the country’s import bill.
“We do not expect the trade account to turn supportive of the won in the near term,” Standard Chartered said in a recent research note. “Slowing global growth and external demand will likely keep the trade account under pressure, outweighing any benefits from a pullback in commodity prices.”