Korean won's rebound continues as rate worries diminish

The won is on a relentless tear driven in part by investors betting inflation will be tamer than expected and rate rises may slow or stop.

People walk near a currency exchange counter in central Seoul on Jan. 10. [NEWS1]

The won is on a relentless tear driven in part by investors betting inflation will be tamer than expected and rate rises may slow or stop.

It's up 17 percent against the dollar since hitting a recent low in October and broke 1,240 to the dollar for the first time since June 2022.

On Tuesday, it traded to 1,239 before giving up some of the gains.

Moderation in wage gains and a contraction in services in the United States in December raised expectations for the Fed to slow the increase in the federal funds rate.

Average hourly earnings rose 0.3 percent after gaining 0.4 percent in the previous month. The on-year wage increase lowered to 4.6 percent, the smallest rise since August 2021.

Service activity contracted for the first time in more than two years as demand weakened. The non-manufacturing Purchasing Managers’ Index (PMI) dropped below 50 for the first time since May 2020.

The figure below 50 indicates contraction in the sector, which accounts for more than two-thirds of the economic activity in the United States.

“Even though the U.S. employment market is still solid, the December figures show they may gradually no longer be as solid and that could lower the chance of the Fed’s rate increase,” said Kim Seung-hyuk, an economist at NH Futures. He added the hopes resulted in a dollar selloff in the market.

The U.S. dollar index, which is a relative measure of the dollar’s strength against a basket of six currencies, including the euro and the yen, was trading at 103.20 on Tuesday from 105.04 on Jan. 5.

The strengthening of the Chinese yuan as a result of the country's border reopening also helped weaken the dollar.

China has lifted quarantine requirements for inbound travelers for the first time since it imposed travel restrictions in March 2020, raising expectations for China’s economy.

The yuan traded at 6.77 to a dollar, from 6.90 on the beginning of this year.

“The won is yuan’s proxy currency because Korea’s economic structure relies considerably on China. When foreign investors want to bet on the strengthening of the yuan, they tend to also bet on the won because they believe the economies of the two countries move in the same direction and due to the relatively closed financial market of China,” Kim added.

The Korea Institute of Finance projected in a December report that the won will trade at around 1,360 this year.

“Changes we expected happened earlier than we had expected,” said Park Sung-wook, a senior research fellow at the Korea Institute of Finance’s macroeconomic division. “Factors strengthened the won, like inflation growth slowing. Though uncertainties in the speed of the decline in inflation growth remain, inflation growth is seen to have passed the peak in the second half of last year,”

The annual inflation rate in the United States slowed for a fifth straight month to 7.1 percent in November and below forecasts of 7.3 percent. The Consumer Price Index for December will be released on Thursday.

Korea’s inflation hit 5.0 percent in December, down from 6.30 percent last July.

“Other global factors, like the ECB’s rapid interest rate increases and Japan’s widening of its target band for interest rates, also weakened the dollar,” Park added.

The won traded at 1,244.7 won when the market closed Tuesday.

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