Korean won at 5-mth high; BOK may not cut interest rate

The South Korean won on Monday touched a five-month high as the central bank may not immediately cut its policy interest rate due to rising property prices although the US Federal Reserve is likely to lower borrowing costs.

The won advanced as much as 2.1% to 1,329.8 per dollar, the strongest since March 21, according to the Bank of Korea.

That came as the greenback fell across the board as the Fed is expected to slash its policy interest rates with inflation slowing amid the growing signs of weakness in the world’s largest economy. The predictions of a BOK rate cut in the near term waned as the real estate prices in South Korea jumped, however.

The US economy is not too severely slowing down to spur concerns about a recession, boosting risk appetite and the won’s value, analysts said. The South Korean currency is likely to strengthen further, probably to 1,320, they added.

“The won may weaken again if worries about the ballooning fiscal deficit ahead of the US election, but that would be short-lived,” said Lee Joowon, an economist at Daishi Securities Co. “The won is expected to appreciate in the mid-to-long term as the foreign exchange market also focuses on the economy.”

BOK NOT TO CUT RATES THIS MONTH

The BOK is expected to keep its policy interest rate at 3.50% later this week, about 90% of participants in The Korea Economic Daily’s survey.

The Fed is widely predicted to slash its benchmark lending rate by 25 basis points (bps) in the upcoming meeting on Sept. 17-18, which will bring down the rate differentials between the two countries to up to 1.75 percentage points from the current 2 percentage points.

The US rate cut forecast increased after data showing that privately-owned housing starts fell 6.8%, adding to concerns over an economic slowdown, while producer and consumer price data already suggested inflation is easing.

The dismal data hurt the US currency. The dollar index, which measures the greenback’s value against since major currencies, headed to the lowest level this year, trading around a crucial support level of 102.

STOP-LOSS DOLLAR SELLING

The dollar’s weakness prompted some traders to rush to dump dollar holdings, which they had built up to bet on depreciation in the won, to cut losses, currency market watchers in Seoul said.

The South Korean unit was still one of the worst-performing Asian currencies with a 3.4% loss against the US dollar so far this year.

“The won did not keep up enough with the recent strength in other Asian currencies,” said a South Korean foreign exchange authority official. “We were aware that stop-loss dollar selling by some investors with key support levels for the dollar/won rate broken added to the won’s appreciation.”

Stop-loss dollar selling has already boosted the Japanese yen.

The Bank of Japan raised its benchmark interest rate in late July, leading to the unwinding of the popular yen carry trade and boosting the currency. Carry trades refer to operations wherein an investor borrows money in a currency with low interest rates, such as the Japanese currency, and invests it in higher-yielding assets.

“The won’s appreciation was similar to the yen’s jump earlier this month when the yen’s short positions were massively unwound,” said Park Sang-hyun, an economist at iM Securities Co.

Some analysts said China’s policy to shore up the yuan to bolster domestic demand supported the won, which was the most correlated and liquid proxy for the Chinese currency.

POWELL, RHEE EYED

Currency investors are keeping an eye on comments from Fed Chair Jerome Powell and BOK Governor Rhee Chang-yong for the won’s future direction.

The local currency is expected to appreciate further if Rhee takes a hawkish stance at a BOK policy meeting on Aug. 22 by emphasizing concerns over rising housing prices, analysts said.

The South Korean unit is likely to weaken again if monetary policy committee members see the need for a rate cut, they added.

Powell is scheduled to speak at the Fed’s annual economic symposium in Jackson Hole, Wyoming, on Aug. 22-24.

Investors are closely watching if the chair will have his chance to provide clues on the path forward for monetary policy.

Given cooling inflation and a slowing economy, the question is not whether the US central bank will cut rates in September but by how much.

Write to Jin-gyu Kang at josep@hankyung.com
 
Jongwoo Cheon edited this article.