South Korea’s financial markets were roiled by a new tapering tantrum after the US Federal Reserve chairman signaled further tightening last week, causing falls in the South Korean currency, bonds and stocks.
On Tuesday, the US dollar closed at 1,348.50 won, 12 won higher than the previous session. This is the highest level since November 23rd and the lowest in 10 months for the South Korean currency. The dollar/won exchange rate reached the day’s high of 1,349.50 dollars.
The Korean currency extended its losing streak as the US dollar strengthened as the yield on 10-year US government bonds rose to 4.5%, the highest level in 16 years.
The US dollar index, which measures the dollar’s value against a basket of six foreign currencies, rose to 106.10, the highest since November last year.
The dollar index and Treasury yields have soared after Federal Reserve Chairman Jerome Powell signaled further interest rate cuts last Wednesday.
South Korean government bonds also followed U.S. government bonds on Tuesday. The yield on the 10-year note added 4.2 basis points to 4.054%, the highest this year. The previous record was 4.031% on September 21st..
The higher the yield, the lower the bond price. Bond yields and prices move in opposite directions.
South Korean stock markets also saw capital flight as investors braced for further tightening by the US central bank.
The country’s benchmark stock index Kospi fell 1.3% to close at 2,462.97 on Tuesday.
“The sharp rise in US 10-year government bond yields has triggered a (new) taper tantrum,” said Park Sang-hyun, an analyst at Hi Investment & Securities, adding, “Korean stocks, bonds, and currency have all slumped. “I am doing so,” he said.
The taper tantrum refers to the panic selling of U.S. Treasuries that triggered a spike in yields in 2013 in response to signals that the Fed was ending its quantitative easing program.
Winning under downward pressure
Market analysts said the outlook for the Korean currency was bleak, anticipating high interest rates in the United States for a long time.
Some predict that the dollar/won exchange rate will exceed 1,400 won by the end of this year.
NH Futures analyst Kim Seung-hyuk said: “The rise in US bond yields further weakened the value of the Korean won against the US dollar, but was driven by expectations that US interest rate increases would persist.” Ta. With inflation expectations rising at $100 per barrel, this is putting upward pressure on the dollar index. ”
The Federal Reserve last week kept the federal funds rate unchanged at its target range of 5.25% to 5.50%, but set its forecast for this year’s highest benchmark overnight rate at 5.6%, opening up the possibility of at least one more rate hike.
Policymakers also expected the policy rate to be at least 5.1% at the end of 2024, compared to the previously expected 4.6%.
The dollar has also strengthened as the risk of a U.S. government shutdown increases after the world’s largest economies have yet to agree on a federal spending bill. Congress must pass the bill by October 1 to prevent a government shutdown.
Global credit rating service Moody’s warned on Monday that its credit rating for the United States would be downgraded if Washington froze. It rates the world’s No. 1 economy with an Aaa stable outlook, the highest among the world’s top three credit institutions.
A month ago, Fitch downgraded the U.S. rating by one notch to AA+, the same rating assigned by S&P Global in 2011.
downward spiral bond
A downgrade in the U.S. credit rating could cause U.S. bond yields to rise even further, providing ground for further appreciation in the U.S. dollar.
Investors are increasingly relying on the dollar as other major currencies show no signs of recovery.
Shin Se-dong, a professor at the economics department of Sookmyung Women’s University in Seoul, said, “Other countries such as European countries suffering from economic recession cannot raise interest rates like the United States.” She said, “The dollar/won pair may exceed $1,400 this year because investors believe that the dollar is the only reliable currency.”
Bond yields are also expected to continue rising.
“The yield on 10-year U.S. government bonds is likely to rise to the low 5% range,” said Moon Hong-chul, an economist at DB Financial Investment. “Local (Korean) bond yields are also expected to continue rising.”
I fell into a dilemma
If the US policy rate is raised another quarter of a percentage point this year, the gap with South Korea’s borrowing costs could widen to a record 2.25 percentage points. South Korea’s policy interest rate is 3.50%.
If that happens, capital outflows from Asia’s fourth-largest economy will further accelerate, and the won exchange rate will fall further.
To prevent capital flight, the Korean central bank may consider: Another interest rate hike by the end of this yearMarket analysts have doubts about the move given the country’s weak economic growth.
If interest rate hikes resume, it will delay the recovery of South Korea’s economy, which has already been hit by high interest rates, a weak won, rising oil prices, and sluggish exports.
The Bank of Korea’s next monetary policy meeting is scheduled for October 19th.
Write destination Do-Won Lim and Sin-Young Park at van7691@hankyung.com
Sookyung Seo edited this article.
