Officials are monitoring the foreign-exchange market with an intent to stem a drop in the won, according to a text message from the nation’s finance ministry. The verbal warning helped the currency rebound from losses, before it again slid to trade near an earlier low of 1,345.20 per dollar.
The tone of the latest warning is stronger than a caution issued in June, when the authorities said they were paying close attention to the won’s “excessive volatility”. South Korea sold a net US$8.3 billion of its foreign-exchange reserves to prop up the currency in the first three months of the year, central bank data showed.
“The won’s drop has slowed after the message from the FX authority, but the currency won’t be spared from the risks stemming from the upcoming Jackson Hole meeting and a stronger greenback,” says Min Gyeong-won, an economist at Woori Bank in Seoul.
Authorities in the region have stepped in to support their currencies, with India, Thailand and Korea seeing their reserves drop by a combined US$115 billion this year as they sold the dollar. A resurgent greenback is exerting pressure as traders brace for US policy makers to reiterate their hawkish stance at a gathering in Jackson Hole this week.
For South Korea, a stable currency is crucial as it relies heavily on outside sources for energy and other materials needed to assemble exports. Food and transportation prices at home have also been under upward pressure from the weakening won, pushing consumer-price growth to the highest level in more than two decades.
The amount of reserves sold by South Korea is the most since at least March 2019 when the central bank started to publish the data. Back then, the won’s rapid decline due to the spillover effect from a US-China trade war spurred a series of warnings, culminating in a snap meeting between policy makers.
Policy decision
The verbal intervention may ease the pressure on the Bank of Korea to deliver a large rate hike when it meets on Thursday, according to Shinyoung Securities Co. BOK governor Rhee Chang-yong has signalled that a quarter point increase is likely to be in store, pointing to debt risks building among households from higher rates.
“This more or less helps reduce pressure on the BOK to consider a bigger hike again,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “It’s true there’s a lot of wariness about the currency, but unless it breaches a shocking level such as 1,400 per dollar, the BOK is unlikely to want to strain itself further.”
The won was down 0.2% to 1341.90 as of 12pm in Seoul. The median forecast in a Bloomberg survey of analysts is for the currency to strengthen to 1,298 by year-end.