Won volatile again as the U.S. rate outlook becomes murky

A screen in Hana Bank's trading room in central Seoul shows the Kospi closing at 2,438.19 points on Monday, down 42.21 points, or 1.70 percent, from the previous trading day. [YONHAP]

The exchange rate is volatile again as the pace of economic growth in the United States remains a point of contention amongst economists and investors.

After hitting 1,210 on Feb. 2, the won is now back in the 1,250 range, and more volatility is expected.

It traded at 1,252.8 to the dollar at Monday's close, up 23.4 won from the previous session's close. The won gained the most ground in 10 months to trade at 1216.4 against the dollar on Thursday, but yielded more than 30 won in only two sessions.

The U.S. currency continues to remain strong compared to other currencies. The dollar index, an index of the dollar's value relative to a six major foreign currencies — the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc — was at 103, 1.4 percent higher than on Feb. 2.

Until last week, the "king dollar" era seemed to near its end, under expectations that the Fed will stop raising interest rates this year. The dollar index continued its downward trend as the market preference for safe assets weakened amid hopes of disinflation.

Employment statistics announced by the U.S. Department of Labor on Friday turned the tide. Total nonfarm payroll employment rose by 517,000 in January, triple the forecast of 187,000. The unemployment rate was at 3.4 percent, the lowest figure in 54 years. Concerns over the extension of Fed rate rises took the lead.

The Kospi dropped 42.21 points (1.7 percent) to close at 2438.19 points on Monday, the with ten largest companies, including Samsung Electronics, falling.

"The market began to question the Fed's interest rate cycle that seemed to end after two or three additional hikes," NH Futures' analyst Kim Seung-hyuk said. "Shrinking confidence in risk assets may lead to the weaker won."

The currency market is expected to continue seesawing until the Federal Open Market Committee reports on March 22. The market can go either way after release of the U.S.'s Personal Consumption Expenditure (PCE) for January, and the Consumer Price Index (CPI) and employment statistics for February, all of which the Fed watches closely.

The general assessment now is that the won will fall in value in the first half but rise in the second half. They anticipate the won to grow stronger gradually as the Fed's interest rate hikes end and China's economy recovers.

"As Korea's economy and exports begin to signal improvement, the won will gain strength," Shinhan Bank analyst Baek Seok-hyun said.

BY SOHN HAE-YONG [sohn.dongjoo@joongang.co.kr]