Won rises as Fed expected to pause rate hikes

The won slipped below the 1,300 mark on Wednesday for the first time since late March, thanks to a slowing trade deficit and expectations that the Federal Reserve will likely pause rate hikes next week.

An electronic signboard at Hana Bank in central Seoul shows won trading below 1,300 won Wednesday. [YONHAP]

The won slipped below the 1,300 mark on Wednesday for the first time since late March, thanks to a slowing trade deficit and expectations that the Federal Reserve will likely pause rate hikes next week.

The Korean currency rose as high as 1,296.8 against the dollar in intra-day trading, inching up 0.86 percent from the previous trading day. It closed at 1,303.80, up 0.33 percent.

Expectations that the Federal Reserve will pause rate hikes in June are weakening the dollar. A country's currency usually rises in value when interest rates are high as higher rates attract more foreign capital.

The CME FedWatch Tool, which forecasts rates using Fed Fund futures contract prices, put the chance of a rate pause at a range between 5.00 and 5.25 percent at 76.5 percent Wednesday. The remaining 23.5 percent projected the Fed to raise the federal funds rate by a quarter percentage point.

“Skipping a rate hike during an upcoming meeting would allow [Fed policymakers] to see more data before making decisions” about additional rate increases, said Fed Governor Philip Jefferson in a speech last week.

“I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target in a timely manner,” Philadelphia Fed President Patrick Harker said during a National Association for Business Economics webinar on Thursday.

The two-day Federal Open Market Committee Meeting starts on Tuesday.

A stubbornly persistent trade deficit had weakened the Korean economy's foundation, in turn weakening the won. However, a deficit that has been shrinking over the past four months is reversing the currency's fortunes.

Korea logged a trade deficit for the 15th consecutive month in May, the first time a trade deficit of that duration was seen since the deficit recorded between January 1995 and May 1997. But this deficit has been shrinking with Korea logging a $2.1 billion trade deficit in May, down from a deficit of $2.65 billion in April, $4.74 billion in March and $5.32 billion in February.

"The fact that Korea already recorded a current account surplus in early 2023 has eliminated a significant amount of factors that weakened the won,” according to Wednesday's eBest Investment & Securities report.

Korea posted a current account surplus of $270 million in March, helped by dividend payments from overseas. But by quarter, the country posted a $4.4 billion current account deficit in the January-March period.

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