The Won-Dollar Exchange Rate Hits 1285 Won Intraday... New High Amid US Inflation Shock

Starting at 1,282.5 KRW/USD on the 12th
Continuous record highs... Highest in 2 years and 2 months
Dollar strengthens as US inflation index exceeds market expectations
Possibility of reaching 1,300 KRW level... Authorities intensify monitoring

[Image source=Yonhap News]

The value of the Korean won is plummeting sharply amid domestic and international adverse factors. The won-dollar exchange rate, which has been hitting new highs daily, started on the 12th well above 1,280 won. This is due to the U.S. Consumer Price Index (CPI) announced the previous day exceeding market expectations, spreading the analysis that the Federal Reserve's (Fed) tightening stance will continue for the time being. In the market, opinions are emerging that the exchange rate could rise above 1,300 won depending on the speed of U.S. interest rate hikes. Companies are on high alert due to the exchange rate's daily volatility.

According to the Seoul foreign exchange market, the won-dollar exchange rate began trading at 1,282.5 won, up 7.2 won from the previous day's closing price. Early in the session, the exchange rate rose to 1,285 won, marking a new high for five consecutive trading days. This is the highest level in about two years and two months since March 19, 2020, during the early spread of COVID-19.

The main reason for the sharp rise in the won-dollar exchange rate on this day is the growing analysis that U.S. inflation may persist for a long time. The U.S. Department of Labor announced on the 11th (local time) that the April Consumer Price Index surged 8.3% compared to the same month last year. Although the increase was slightly slower than the previous month (8.5%), it was higher than the expert forecast of 8.1%.

In response, U.S. media predicted that the Fed is more likely to maintain its high-intensity tightening monetary policy considering the high inflation level. Earlier, Fed Chair Jerome Powell implemented a 'big step' by raising the benchmark interest rate by 0.5 percentage points at once last week and hinted at two more similar rate hikes, but the market also mentions the possibility of the Fed taking a 'giant step' by raising rates by 0.75 percentage points depending on inflation conditions. Yumi Kim, head of the investment strategy team at Kiwoom Securities, explained, "The Fed will have no choice but to adopt an aggressive stance in response to rising inflation."

In particular, with the added fear of stagflation?where inflation rises despite economic slowdown?demand for the safe-haven U.S. dollar is surging, and the value of the relatively risky won is weakening. The U.S. Dollar Index rose 0.13% from the previous day, surpassing the 104 mark, and the Chinese yuan, which moves in tandem with the won, also weakened as the dollar-yuan exchange rate fluctuated around 6.76 yuan, up 0.09% from the previous day.

The foreign exchange authorities have stepped up market monitoring amid the soaring exchange rate. A Bank of Korea foreign exchange market team official said, "Investor sentiment deteriorated as the U.S. inflation index exceeded expectations and concerns over the Fed's high-intensity tightening revived," adding, "We are monitoring the market with vigilance and will take necessary measures if needed."