Won hits 15-year low after Fed signals plan to slow rate cuts

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Won hits 15-year low after Fed signals plan to slow rate cuts

Published: 19 Dec. 2024, 18:49

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

U.S. Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington on Dec. 18 following the Federal Open Market Committee (FOMC) meeting. In Korea, the won-dollar exchange rate soared above the 1,450 won per dollar mark for the first time in 15 years and nine months following the FOMC meeting. [EPA/YONHAP]

The Korean won tanked to a 15-year low on Thursday, its weakest point since the 2008 financial crisis, with the U.S. Federal Reserve signaling a hawkish shift in next year’s rate outlook.

Authorities are scrambling to curb the persistent surge in volatility as the latest development intensifies devaluation pressures on the local currency, which has already been on a sharp weakening trend driven by U.S. policy shifts, domestic political uncertainty and the country’s waning growth momentum.

Hawkish outlook drives dollar to two-year high

The won-dollar exchange rate closed at 1,451.90 won on Thursday at 3:30 p.m., up 16.4 won (1 cent) from the previous session, after opening at 1,453 won per dollar.

It was the first time since March 2009 that the won-dollar rate had closed above the 1,450 mark.

The sharp plunge in the currency's value followed the Federal Reserve's hints that it would scale back the pace of rate cuts in 2025.

The U.S. central bank delivered its third consecutive rate cut on Wednesday following the two-day Federal Open Market Meeting, lowering its benchmark rate by 25 basis points to a range of 4.25 to 4.50 percent as had been widely expected.

However, Fed Chairman Jerome Powell called for a “cautious” pace of rate reduction during a news conference following the FOMC meeting, indicating a hawkish turn in monetary decisions next year.

U.S. policymakers are now expecting two 25-basis-point cuts next year, instead of the previously anticipated four, according to the Fed’s quarterly summary of economic projections.

The U.S. dollar index — a measure of its value relative to a basket of six foreign currencies — soared to a two-year high of 108.27 following the FOMC meeting.

Korea scrambles to get back on its feet

The Ministry of Economy and Finance held an emergency meeting on macroeconomic issues ahead of the market's opening on Thursday, urging a “calm” response.

“With major currencies experiencing a significant depreciation, Korea’s financial and foreign exchange markets are expected to see larger short-term volatility as well,” said Finance Minister and Deputy Prime Minister Choi Sang-mok in his opening remarks.

“As an excessive tilt to one direction may lead to a huge reversal to the opposite direction in the future, market participants need to take a calm approach,” said Choi.

While promising to implement stability measures if necessary, Choi added that the government will include its plans to ensure a stable supply of foreign currency, facilitate transactions during extended trading hours and improve transaction infrastructure ahead of Korea's planned inclusion in the World Government Bond Index in next year’s economic policy direction.

Moreover, the Bank of Korea (BOK) and Finance Ministry agreed to expand their foreign exchange swap arrangement with the National Pension Service (NPS) by upping the deal’s cap from its current $50 billion to $65 billion and to extend its validity period to the end of 2025.

The currency swap deal enables the authorities to provide dollars to the pension fund in exchange for an equivalent amount of won. The NPS later returns the same amount of dollars to the authorities for conversion back to the local currency.

Such a deal aims to absorb dollar demand from the NPS and therefore mitigate appreciative pressure on the dollar’s value in the spot market.

Meanwhile, the Financial Services Commission requested that lenders extend foreign currency payment deadlines and loan maturity to alleviate the foreign exchange burden on companies.

The government has been rolling out a series of messages to convince investors of the nation's stability since President Yoon Suk Yeol’s martial law declaration on Dec. 3 rattled the foreign exchange market.

Nevertheless, with the accelerated strengthening of the dollar and Korea facing weaker growth next year, analysts are adjusting their short-term forecasts for the won-dollar rate further upward.

“In Korea, expectations of additional rate cuts within the first half of next year have been growing due to recent political risks,” said NH Investment & Securities analyst Kwon Ah-min.

NH Investment & Securities projected that depreciation pressure on the won would remain in place and that the won-dollar exchange rate would average the 1,400 won level in the first half of 2025, an increase from its previous forecast of 1,380 won.

BY SHIN HA-NEE [[email protected]]