Won and stocks plunge as Korea struggles with rates and inflation

An electronic billboard in central Seoul shows the won hit 1,350 won to the dollar on Monday, the lowest in 13 years and four months. [YONHAP]

The won renewed its more than decade-long lows after central bankers reaffirmed their hawkishness in Jackson Hole, Wyoming, over the weekend.

The Korean currency touched 1,350.80 won per dollar on Monday, its lowest level in 13 years and 4 months. It is down more than 1% from Friday.

The steep drop comes as inflation rages in Korea and the government and central bank struggle to regain control.

Bang Ki-sun, vice minister of economy and finance, again warned investors not to take advantage of the situation, adding that the authorities were ready to act.

“The government will intensify its policy efforts to stabilize the market to prepare for excessive herd behavior in the market,” he said on Monday.

On Friday, Bang said the government would respond to speculative behavior. He said the ministry would “take action to stabilize the market on signs of speculative movements.”

The Kospi fell more than 2% on Friday as foreign investors and domestic institutions sold shares. Samsung Electronics fell 2.33% and SK hynix 2.73%.

The government has said it will intervene directly in the bond market if necessary, and on Monday Yonhap reported that the financial watchdog began investigating Morgan Stanley for illegal short selling.

Korea didn’t think it was time to discuss a swap deal with the United States during President Joe Biden’s visit in May, saying at the time that “the fundamentals are strong.” When Treasury Secretary Janet Yellen came to Seoul in July, the two countries agreed to cooperate to stabilize the currency market.

The market decline followed hawkish remarks made at the three-day Jackson Hole Economic Symposium, which ended Aug. 27. Central bankers, finance ministers and academics attend the annual event to discuss economic policy.

Fed Chairman Jerome Powell said Friday that the Federal Reserve will “use our tools forcefully” to control inflation which is near 40-year highs. Powell said it was “not a place to stop or take a break” in terms of increasing rates.

“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” he said, according to a Federal Reserve transcript. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

The policy direction of the Fed matters because it affects the policies of other central banks, including Korea.

The Bank of Korea cannot stop monetary tightening before the Fed, central banker Rhee Chang-yong said in an interview with Reuters on Saturday.

The Bank of Korea raised the base interest rate another quarter point last week to 2.50% and signaled further rate hikes to curb inflation which is expected to hit a 24-year high. year.

The Bank of Korea expects annual inflation in Korea to reach 5.2% this year.

“We are now independent of the government, but we are not independent of the Fed,” Rhee said. “So if the Fed continues to raise the interest rate, there will be pressure to depreciate our currency.”

In an interview with Bloomberg, Rhee cited global oil and gas prices, China’s Covid policy, and economic downturns in China and the United States as factors affecting Korea’s outlook.

He predicted that Korean inflation would fall below 3% by the end of next year.

Korea started raising the rate last August, earlier than other major central banks, but it won’t be able to end the rate hike sooner, according to Rhee.

“If we can finish earlier – I don’t think so,” Rhee told Reuters.

BY JIN MIN-JI [[email protected]]

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