Won and stocks plunge as Korea struggles with rates and inflation

An electronic display board in central Seoul shows the won breaking 1,350 to the dollar Monday.[YONHAP]

The won renewed decade-plus lows after central bankers reaffirmed their hawkishness in Jackson Hole, Wyoming, last week.

Korea's currency touched 1,350.80 won per dollar on Monday, its weakest level in 13 years and 4 months. It is down more than 1 percent from Friday.

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

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

"The government will step up policy efforts to stabilize the market to brace 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 will "take action to stabilize the market on signs of speculative movements."

The Kospi tumbled more than 2 percent on Monday as foreign investors and domestic institutions net sold shares. Samsung Electronics fell 2.33 percent, and SK hynix 2.73 percent.

The government has said that it will intervene directly in the bond market if necessary, and on Monday, Yonhap reported that the Financial Supervisory Service has started to investigate Morgan Stanley for illegal short selling.

Korea did not think it was time to discuss a swap agreement with the United States when President Joe Biden visited 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 in stabilizing the currency market.

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

Fed Chairman Jerome Powell said on Friday that the Federal Reserve will "use our tools forcefully" to control inflation that is running near 40-year highs. Powell said that this is "no place to stop or pause" in terms of rate increases.

"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," he said, according to a transcript from the Federal Reserve. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

The Fed's policy direction is important as it affects the policies of other central banks, including Korea's.

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

The Bank of Korea upped the base interest rate by another quarter point last week to 2.50 percent, and signaled further rate increases to reduce inflation projected to reach 24-year highs.

The Bank of Korea forecast Korea's annual inflation to hit 5.2 percent this year.

"We are now independent from government, but we are not independent from the Fed," Rhee said. "So if the Fed continues to increase the interest rate, it will have a depreciation pressure for our currency."

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

He forecast Korea's inflation to drop below three percent by the end of next year.

Korea started upping the rate last August, earlier than other major central banks, but it won't be able to end the rate increase earlier, according to Rhee.

"Whether we can end earlier — I don't think so," Rhee told Reuters.

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