Won rebounds after hitting yearly low amid global tightening, heightened uncertainty

September 16, 2022

South Korea’s currency rebounded Friday after hitting a new yearly low in intraday trading amid worries over the U.S. Federal Reserve’s continued monetary tightening and its impact on the global economy.

The local currency closed at 1,388.0 won per dollar, up 5.7 won from the previous session’s close. It bounced back near the market close after falling to as low as 1,399.0 earlier in the day amid speculation that foreign exchange authorities may have unloaded dollars to defend the won’s value.

Market watchers have closely watched the foreign exchange market as the won has been on the decline, flirting with the 1,400 mark that has not been breached for over 13 years.

The local currency has depreciated at a fast pace especially in the last few days after latest U.S. economic data pointed to a continued rise in inflation, causing investors to believe the Fed will continue its aggressive monetary tightening down the road.

The U.S. central bank is now widely expected to deliver at least a 75 basis point rate hike next week following raises in June and July.

The won has been under downward pressure as the dollar gained ground against major currencies amid the Fed’s monetary tightening and growing worries over an economic recession in the United States that prompted investors to avoid risks and buy dollars seen as safe assets.

The won has lost about 15 percent against the dollar so far this year.

A weak local currency is feared to hamper the Seoul government’s efforts to keep a lid on fast-rising inflation driven by high energy and commodity prices as the fall could make imports more expensive.

It also could augment the Bank of Korea’s case for continued rate hikes to rein in inflation.

The central bank has hiked its policy rate seven times by a combined 2 percentage points since August last year, including the latest 0.25 percentage-point rise last month.

Market volatility has mounted as the country’s economy is faced with growing uncertainty with its exports growing at a slower pace and its trade deficit widening amid worries over a global economic slowdown.