South Korean Won Plummets to 15-Year Low Amidst Fed’s Hawkish Stance and Domestic Political Turmoil
SEOUL – The South Korean won tumbled to its weakest level in 15 years on Thursday, battered by a confluence of negative factors, including risk aversion stemming from the U.S. Federal Reserve’s cautious outlook on future interest rate cuts and escalating domestic political uncertainty. The currency breached the psychologically significant 1,450 won per dollar mark, reaching its lowest point since March 2009, signaling growing concerns about the South Korean economy’s vulnerability to external and internal pressures.
The Fed’s decision on Wednesday to cut interest rates, while anticipated, was accompanied by a more hawkish tone than markets had expected. Fed Chair Jerome Powell indicated that further rate reductions would be contingent on demonstrable progress in taming stubbornly high inflation. This cautious approach, coupled with revised projections suggesting fewer rate cuts next year and higher inflation estimates, bolstered the dollar and exerted further downward pressure on the already beleaguered won. Market participants interpreted the Fed’s stance as a signal that the aggressive easing cycle might be nearing its end, diminishing the attractiveness of emerging market currencies like the won.
Adding to the won’s woes is the ongoing political turmoil in South Korea following President Yoon Suk Yeol’s controversial attempt to implement martial law earlier this month. The political instability has further undermined investor confidence in the South Korean economy, contributing to the won’s precipitous decline. The Bank of Korea, acknowledging the negative economic repercussions of the martial law declaration, has highlighted downside risks to its growth forecasts for both this year and the next, reinforcing the negative sentiment surrounding the currency.
The won’s sharp depreciation against the dollar, extending losses for a third consecutive month and reaching a staggering 11% year-to-date drop, marks it as the worst-performing emerging Asian currency of the year. It is on track to record its worst annual performance since the global financial crisis of 2008, underscoring the severity of the challenges facing the South Korean economy. The currency’s slide reflects a combination of external pressures, such as the Fed’s policy shift and global trade tensions, and internal vulnerabilities, including political instability and slowing economic growth.
In response to the escalating currency crisis, South Korean authorities have pledged to take swift and decisive action to stabilize financial markets. The finance minister emphasized the government’s commitment to deploying measures to curb excessive volatility and bolster the won. Market observers have noted suspected interventions by authorities to defend the 1,450 won per dollar level, indicating a concerted effort to prevent a further freefall of the currency. The Financial Services Commission has urged local banks to actively manage foreign exchange transactions and loans to help mitigate the pressure on the won.
Furthermore, the Bank of Korea has expanded its foreign exchange swap line with the National Pension Service, a strategic move aimed at absorbing dollar demand generated by the pension fund’s growing overseas investments. This measure serves as a market stabilizer, providing a buffer against further depreciation of the won. The concerted efforts by South Korean authorities reflect the gravity of the situation and the urgent need to restore confidence in the currency and the broader economy. The effectiveness of these interventions, however, remains to be seen, as the won continues to face significant headwinds from both domestic and international factors. The ongoing political uncertainty and the Fed’s cautious approach pose ongoing challenges for the South Korean currency, and market participants will closely monitor developments in both areas for signs of stabilization or further deterioration.
