Won and stocks decline following Fed chair's comments

Electronic display boards at Hana Bank in central Seoul show Wednesday market. [NEWS1]

Korean markets were rattled Wednesday following hawkish remarks by the Federal Reserve chairman, who cautioned that the battle against inflation isn’t over.

The won fell 1.69 percent against the dollar, ending the trading day at 1,321.40. It was the most dramatic decline since the 1.90 percent fall on Feb. 6.

Stocks also declined, with the Kospi down 1.28 percent, as foreign and institutional investors unloaded shares.

The weak market followed Federal Reserve Chairman Jerome Powell’s hawkish remarks warning that the U.S. policy rate might need to rise even faster and higher than expected to tame inflation.

“The ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told the Senate banking committee during a congressional appearance on Tuesday. He noted that recent economic data were “stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”

Fed officials projected in December the policy rate would peak at 5.00 to 5.25 percent.

The Fed has raised its benchmark rate eight times over the past year to the current range of between 4.50 and 4.75 percent, higher than the Bank of Korea’s 3.50 percent.

The rate gap can affect the exchange rate as funds tend to flow toward higher interest rates.

The next two-day FOMC meeting is scheduled to start on March 21.

Bank of Korea Gov. Rhee Chang-yong said on Tuesday that an excessively wide gap could result in unexpected side effects.

“The Bank of Korea is practicing monetary policy while reviewing the side effects that the rate gap could bring,” Rhee said in a debate.

He added there are more elements that need to be considered than just the rate gap.

“Other factors, like how long the strengthened dollar lasts, play a bigger role in the movement of the foreign exchange rate instead of the rate gap itself,” he said, further noting that the reopening of the China economy is another external factor that will play a major role in determining the won-dollar exchange rate.

The Bank of Korea kept the rate unchanged at the last Monetary Policy Board meeting, which was held last month. It was the first time the board maintained the rate steady at a meeting since February 2022.

But the central banker stressed that the decision shouldn’t be regarded as a halt of the monetary tightening, adding that taming inflation will be a priority in its monetary policy operations.

The Bank of Korea’s next rate-setting meeting is scheduled to take place on April 11.

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