Won strengthens as inflation peak seen and China ends lockdown

The won traded at 1,237.2 won against the dollar on Tuesday, having appreciated 4.2 percent from May 12. [YONHAP]

Korea's currency is appreciating against the dollar following signs of easing inflation and as China lifts its lockdown in Shanghai.

The won has appreciated about 4 percent after hitting 1,291.50 against the dollar on May 12, a two-year high.

Rising interest rates have put pressure on Korea, with funds flowing outward to chase higher yields, especially in the United States.

Signs indicating inflation has peaked contributed to the recent appreciation of the won.

The U.S. personal consumption expenditures (PCE) index was up 4.9 percent in April on year, down from 5.2 percent in March.

PCE is a measure of personal consumption expenditure prices excluding food and energy. It is the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions.

Including food and energy, the PCE increased 6.3 percent in April on year, down from 6.6 percent the prior month.

"As there are expectations that inflation in the United States has peaked out, concerns about Fed policy are declining," said Min Byung-kyu, a global market analyst at Yuanta Securities. "The year-end base interest rate projected by the FedWatch has been lowered from a range of 2.75 percent to 3.0 percent in early May to 2.5 percent and 2.75 percent."

FedWatch is a tool used to predict the probability of Fed interest rate move.
Another contributing factor behind the appreciating won is China's lifting of lockdown.

Shanghai is ending its two-month Covid-19 lockdown on Wednesday. Shanghai authorities said Sunday they would lift "unreasonable" restrictions for businesses to resume operations from Wednesday.

"The market seems to be relieved by the recent price indexes and the easing of lockdown in China," said Baek Suk-hyun, an economist at Shinhan Bank. "If unfavorable factors don't surface, especially from China, the won may reach 1,220 in a short run."

As the won depreciated, some investors called for Korea to sign a currency swap with the United States. A deal was not reached during President Joe Biden's visit to Korea on May 20.

Korea signed currency swaps with the United States twice, once in 2008 and another in 2020.

BY JIN MIN-JI, YEOM JI-HYEON [jin.minji@joongang.co.kr]