Plunging won exacerbates inflation woes

 Bank of Korea Governor Rhee Chang-yong / Yonhap

Fears of further rises in the prices of goods and services are mounting, amplified by a nearly 8 percent year-to-date unmuted depreciation of Korea’s currency against the U.S. dollar, market watchers said Monday.

The weaker currency-oriented spikes in import prices combined with stalled rate cuts by the U.S. Federal Reserve (Fed) are major monetary policy consideration factors, pushing back the timing of easing for the Bank of Korea (BOK). The Korea’s central bank’s previous forecast had the figure pegged at around 1,200 won end-year.

Some say the Korean currency would plummet further below the psychologically significant barrier of 1,400 won, unless the Fed turns dovish before the Korea’s central bank.

Others say the currency depreciation concerns are overblown. The recent dip in valuation is, they say, ascribed more to the currency volatility in Japan and Europe, unlike mid-April plunging explained exclusively by strong U.S. dollar amid then dimming hopes of early Fed rate cuts and military escalation in the Middle East.

“The Korean currency will not see gains against the greenback any time soon,” said Chang Min, a senior research fellow at Korea Institute of Finance.

The BOK easing will, in his view, widen the Korea-U.S. rate differential, propelling volatile risk-on investor sentiment and consequent reorientation of their capital.

The figure remains 2 percentage points. Korea’s key rate stands at 3.5 percent, whereas the figure for the U.S. is at between 5.25 percent and 5.5 percent.

“The Fed rate cut preceding the BOK will push the Korean currency to edge up. But the currency will have no upward growth momentum, if it unfolds the other way around,” the former BOK official added.

The Korean won traded at a steady 1,300.4 won against the greenback, Jan. 3. However, it broke the 1,400 won barrier, April 16, rattled by wider war 안전 fears between Israel and Hamas. The currency then gained to a range of between 1,360 won and 1,380 won the following week, as stabilized by the foreign exchange authorities’ verbal market intervention.

It further stabilized to the 1,350 won range mid-last month, only to reverse months of gains to touch the 1,390 won.

Among local brokerages with downgrades in currency value trajectories are Meritz Securities and NH Investment.

They both said the Korean won would weaken by a range of between 10 and 20 won this year, anticipating the figure to sink to as low as 1,380 won.

The won ended at 1,389 won against the U.S. dollar, Monday, shedding 0.7 won from the previous session.

The next BOK monetary policy meeting is scheduled for July 11.

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