South Korean Won Nears Critical Level Amid Pressure from Hawkish Fed Decision

Key Takeaway

• The South Korean won is under pressure, nearing the critical 1,400 per dollar level, risking intervention by authorities.
• A hawkish Federal Reserve decision could exacerbate the won's decline, already down 6.5% this year due to a strong dollar.
• Regional currencies like the yen and yuan are also affected by rising US yields and anticipated weaker Chinese yuan fixing.

South Korean Won Under Pressure

The South Korean won is facing significant pressure as it approaches the critical level of 1,400 per dollar, a threshold that has previously prompted intervention by authorities. The currency has declined by 0.9% over the last two sessions, and a more hawkish-than-expected Federal Reserve policy decision this week could exacerbate its weakness. Analysts suggest that a sustainable break past 1,382 per dollar could trigger verbal warnings, while a drop past 1,400 will likely prompt defensive actions from South Korean authorities.

Wee Khoon Chong, senior market strategist for Asia Pacific at BNY Mellon in Hong Kong, noted, "All eyes are on the FOMC this week." The won has weakened around 6.5% this year, largely due to a resurgent dollar impacting foreign-exchange markets. While a weaker won can boost export competitiveness, rapid depreciation raises concerns over capital outflows and financial market instability, which officials in Seoul aim to avoid.

Economic momentum in China, South Korea's largest trading partner, has also contributed to the won's decline. The currency fell 0.2% to 1,378.30 per dollar on Tuesday, making it one of Asia's worst-performing currencies alongside the yen and baht. Korean authorities have stated that they do not target a specific level for the won but engage in "smoothing operations" to ease market volatility.

Federal Reserve's Impact

The upcoming Federal Reserve policy decision is a focal point for investors globally, with significant implications for various markets, including currencies, stocks, and bonds. The Fed's rate trajectory has been a major driver of market movements over the past year, with swaps traders reducing their bets on the number of rate cuts from more than six at the start of 2024 to closer to one. This shift has led to a selloff in Treasuries and a rebound in the dollar, negatively affecting Asian currencies such as the yen and the yuan.

Motonari Sakai, chief manager of the foreign-exchange and financial products trading division at Mitsubishi UFJ Trust & Banking Corp, highlighted the importance of the Fed's decision: "I have no dinner appointments, I will refrain from drinking at home to watch the US CPI release in peace. Then I will probably stay up at night for the Fed decision at 3 a.m."

Sakshi Gupta, principal economist at HDFC Bank Ltd, emphasized the meeting's significance for the Indian rupee: "The meeting is very important especially for the rupee. It could be a trigger for the rupee to move into a new range."

Regional Market Reactions

The strength of the US dollar, buoyed by increasing US yields, continues to put pressure on Asian currencies. The anticipated weaker Chinese yuan (CNY) fixing, as Chinese policymakers return from holidays to address recent market shifts, is expected to further amplify regional currency weakness. The Mexican peso's slide on comments from president-elect Sheinbaum serves as a cautionary example for other currencies ahead of the US CPI and Fed policy decision.

Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd in Singapore, is preparing for the impact: "Set the alarm — it’s going to be extra wee early. Ideally, the right way to prepare for this is to take the day off, sleep through the afternoon, wake up at 11 p.m. with some coffee and Twisties, and sit in front of the screen."

Kyle Rodda, senior financial market analyst at Capital.com, also highlighted the importance of the Fed's decision: "The alarm is set at 3:55 a.m. in Melbourne. Straight in front of the laptop at home before a quick run into the office after the presser. The dealing team has it worse."

Street Views

• Wee Khoon Chong, BNY Mellon (Neutral on the South Korean won):

  "The won’s sustainable break past 1,382 per dollar could trigger some verbal warnings, while the currency’s drop past 1,400 will likely to be defended. All eyes are on the FOMC this week."

• Moon Junghiu, KB Kookmin Bank (Bearish on the South Korean won):

  "The won could weaken past 1,400 per dollar this week if the Fed signals less rate cuts in this year and the next. The currency has already declined below 1,350 per dollar and could technically weaken to as low as 1,450 per dollar."