Won's retreat continues after surprise U.S. inflation reading

The won fell to another decade-plus low on Wednesday following a report of higher-than-expected inflation in the United States.

An electronic display board at Hana Bank in central Seoul shows currency exchange rate Wednesday. [YONHAP]

The won fell to another decade-plus low on Wednesday following a report of higher-than-expected inflation in the United States.

Korea's currency was trading at 1,395.5 to the dollar on Wednesday, losing almost 1.6 percent in value from the previous day.

The won hasn't been at these levels since March 2009 in the aftermath of the global financial crisis.

It is down about 17 percent year to date.

A weak and falling won puts Korea in a difficult position. Imports become more expensive, further fueling inflation, while pressure on the central bank to raise rates, threatening balance sheets of indebted households and a teetering housing market.

Korea has no swap agreement in place with the United States after the most recent agreement expired at the end of last year, leaving it vulnerable to dollar shortages and panic selling.

The government has few tools at its disposal to counter the rout other than talking up the won, threatening speculators and promising to step in to assist companies under stress as a result of the decline.

Stocks dropped as well Wednesday — with the main indexes down more than 2.5 percent in early trading — following falls in the United States. The Nasdaq Composite Index was down 5.16 percent in trading Tuesday, while the S&P 500 was off 4.32 percent.

Samsung Electronics fell more than 3 percent intraday and SK hynix more than 3.5 percent.

The currency and stock declines followed a Consumer Prices Index report Tuesday that showed persistent and higher-than-expected inflation.

Prices in the United States rose 8.3 percent in August from a year earlier, compared with 8.5 percent rise in July.

Core inflation in August came in at 6.3 percent, up from 5.9 percent in July and more than the 6.1 percent projection.

High inflation is raising the possibility of another 75 basis point rise by the Fed next week, with some analysts forecasting a full point.

Fed Chairman Jerome Powell said recently that some short-term economic pain must be felt in order to contain inflation.

The target range for the federal funds rate is 2.25 to 2.5 percent, compared to Bank of Korea's 2.5 percent base rate.

The yield on the two-year Treasury in the United States, which typically reflects interest rate expectations, spiked to its highest level since November 2007 on Tuesday.

"Despite a quarter percentage point increase of Korea's base interest rate, the won has been weak due to poor investment sentiment caused by the Fed Chairman Powell's reaffirmed stance on a continued monetary tightening during a speech at the Jackson Hole meeting, the weak Chinese yuan on concern about an economic slowdown, Korea's trade deficit and concerns about energy supply chain disruptions," the Bank of Korea said in a statement Wednesday.

Korea reported a $9.47 billion trade deficit in August, nearly double the previous month's $4.70 billion. The trade balance in the first 10 days of September was minus $2.44 billion.

The central bank noted $1.71 billion of net inflows of foreign capital in August, compared to $3.7 billion in July.

"In the two remaining meetings until the end of the year, I think we need to keep the rate-increasing stance as long as there are no huge unexpected factors that warrant changes," a Monetary Policy Board member said at a meeting in August, according to released minutes.

Inflation in Korea was 5.7 percent in August after a 6.3 percent reading in July, the highest in about a quarter century.

BY JIN MIN-JI [jin.minji@joongang.co.kr]