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Won up after Yellen speech

March 19, 2015

The dollar fell 1.1 percent on Thursday to finish at 1,117.2 won. (Yonhap)

By Choi Kyong-ae

The Korean won rose against the U.S. dollar after the Federal Reserve took a cautious stance toward a rate increase, bringing a brief halt to the dollar’s months-long rallying against other currencies, analysts said Thursday.

Surprised by the Fed’s dovish longer-term stance on rates though it removed the word “patient” in the Federal Open Market Committee (FOMC) statement, investors bought stocks and bonds, while selling dollars, they said.

The dollar fell 1.1 percent on Thursday to finish at 1,117.2 won. The U.S. currency has risen 1.6 percent this year against the won. The benchmark Korea Composite Stock Price Index rose 0.5 percent to 2037.89.

In the FOMC meeting held on March 17 and 18, the Fed removed a pledge that it would remain “patient” before starting to raise interest rates. “But a rate hike is likely to happen in September, not in June, as widely expected, given the Committee’s lowered outlook for growth and inflation,” said BS Investment & Securities analyst Park Sang-kyu.

Park and other analysts took a cue from Fed Chairman Janet Yellen’s comments after the FOMC meeting.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Yellen told reporters. The Fed has a meeting next month before the June gathering, but made it clear that it “wouldn’t move” at the April meeting.

Currency analysts said the dollar will go through a short-term correction period following its recent gains because investors see an upcoming rate hike as already factored into the dollar’s strength.

“The Fed said it would raise rates when it is reasonably confident that stubbornly low inflation nears the 2 percent target and the job market improves further. But it is still possible for the Fed to raise rates in June,” Eugene Investment & Securities analyst Lee Sang-jae said.

Inflation has run below the target for the past 22 months, reflecting a global weakness and other economic uncertainties. The Fed forecast inflation of 0.6 percent to 0.8 percent for this year.

The Fed said in the statement that economic growth has moderated somewhat and a strong dollar has put downward pressure on U.S. exports. This means Fed officials can wait longer than expected before acting on rates, said Samsung Futures currency analyst Jeon Seung-ji.

“Whether a rate hike comes in June or September, the Bank of Korea will face pressure to make another rate cut in the coming months following a 25 basis point cut last month to stimulate spending and avoid inflation,” Jeon said.

The additional rate cut would allow the dollar to rise to 1,140 won but it won’t help Korean exporters much in global markets if the won’s weakening pace is still slower than the euro and the yen, she said.

The Fed cut its benchmark rate to near zero in December 2008 during the financial crisis, and has kept it unchanged since to stimulate the economy through the recession.