SVB Bankruptcy Lowers US Tightening Expectations... Won-Dollar Exchange Rate Plummets 22 Won

On the 11th (local time), an employee of Silicon Valley Bank (SVB) located in Santa Clara, California, USA, is entering the main entrance of the headquarters. [Image source=Yonhap News]

The Korean won to US dollar exchange rate plunged more than 20 won as expectations grew for the Federal Reserve (Fed) to slow its tightening pace following the bankruptcy of Silicon Valley Bank (SVB) in the United States.

On the 13th, in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1,301.8 won, down 22.4 won from the previous trading day. The rate opened at 1,317 won, fluctuated around the 1,310 won level in the morning, and dropped to as low as 1,298 won in the afternoon.

This was the first time in about a week that the exchange rate fell below 1,300 won during intraday trading, since the 7th when it hit 1,297 won.

The decline in the won-dollar exchange rate was due to the rapid bankruptcy of SVB, the 16th largest bank in the US, over two days last weekend, which significantly weakened expectations for prolonged Fed tightening.

Since this incident was caused by a credit crunch resulting from the Fed’s rapid interest rate hikes, it is analyzed that the Fed will not take a 'big step' (a 0.50 percentage point increase in the benchmark interest rate) at the Federal Open Market Committee (FOMC) meeting scheduled for the 21st-22nd of this month to prevent the spread of a financial crisis.

Goldman Sachs even forecast that the Fed will hold rates steady this month. Goldman Sachs emphasized, "To restore depositors' confidence, authorities must supply abundant liquidity to the market."

Accordingly, the dollar index, which shows the value of the US dollar against the currencies of six major countries, fell 0.7% from the previous day to 103.8.

However, on the same day, the US government and the Fed announced measures to guarantee all customer deposits and provide loans to liquidity-strapped financial institutions to prevent the crisis from spreading due to the SVB incident, which reassured the market.

Given that this incident has heightened global uncertainty and could lead to significant foreign currency outflows from the domestic stock market, potentially weakening the won and pushing the exchange rate higher, financial authorities plan to strengthen monitoring.

On the day, the Bank of Korea emphasized, "We will closely monitor the impact of this incident on domestic interest rates, stock prices, exchange rates, and capital flows, and take appropriate market stabilization measures if necessary."