Won's fall continues as Korea's options are few

An electronic display board at Hana Bank in central Seoul shows the won trading at 1,362.60 against the dollar on Sept. 2. [NEWS1]

The won's rout continued as the bad news kept piling up.

It hit 1,363.0 against the dollar and closed at 1,362.6 on Friday. The currency hasn't been at these levels since April 1, 2009.

Korea is facing a myriad of challenges that weigh on the won and is short of easy solutions as each and every option only makes the problem worse. So far it has been limited to "verbal interventions" to talk up the currency and threats against speculators.

Exports are weakening while imports are surging as oil prices remain high and as the value of the won falls. The country logged five consecutive monthly trade deficits and a record monthly deficit of $9.47 billion in August.

Even semiconductors, which had clocked 25 consecutive months of export increases, are failing to carry the day. In August, semiconductor exports stood at $10.78 billion, down 7.8 percent on year.

China's lockdowns of major cities, including Chengdu and Dalian, are affecting the trade balance. China was Korea's largest trading partner last year, taking 25.3 percent of Korea's exports.

Rate pressures are also weighing on the currency.

With the United States battling inflation with a vengeance, rates are set to rise further, which puts pressure on other currencies as capital moves into higher yielding dollar investments.

The U.S. fed-funds rate is now in a range of 2.25 to 2.50 percent and big increases, of half a point or more, have been suggested by Federal Reserve officials.

The hawkishness was reaffirmed at the Jackson Hole meeting in August when Fed Chairman Jerome Powell pledged that the central bank will "use our tools forcefully."

"These are the unfortunate costs of reducing inflation," he said in prepared remarks. "But a failure to restore price stability would mean far greater pain."

The U.S. dollar index — which measures the value of the dollar against the euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona — reached 109.69 on Sept. 1, the highest level since June 19, 2002.

The falling won pressures the Bank of Korea to continue raising rates despite inflation seeming to be near the peak and the Korea market already shaken by the increases in borrowing costs.

Inflation in Korea hit 5.7 percent in August, slightly lower than the 6.3 percent in July. It was the first time the number dropped since January.

"It's early to say inflation has peaked as the inflation ascending pressure has not been resolved due to a fall in the won," said Cho Young-moo, a researcher at LG Business Research. "From the Bank of Korea perspective, it will face pressure if U.S. rates rise higher than those in Korea and if imported prices rise further."

The Bank of Korea raised the base rate by a quarter percentage point to 2.5 percent.

Finance Minister Choo Kyung-ho, Bank of Korea Governor Rhee Chang-yong and Financial Services Commission Chairman Kim Joo-hyun are holding a meeting on the economy on Monday.

BY AHN HYO-SUNG, JIN MIN-JI [jin.minji@joongang.co.kr]