Korean won rises on expectations of U.S. rate freeze, better chip biz

The Korean won rose to 1,290 won per dollar for the first time in two months, driven by expectations of a freeze in U.S. interest rate hikes.

The possibility of a rate hike by the U.S. Federal Reserve next week has been raised as the central banks of Canada and Australia continue their streak of unexpectedly high interest rates, but a weak jobs report is sharply weighing on the Fed’s decision in favor of keeping rates on hold. Last week, the U.S. Labor Department announced that new jobless claims rose to 261,000 for the week of May 28-June 3, a 21-month high.

“With the announcement of jobless claims, the market is betting on a freeze in interest rates in June,” said Kim Seung-hyun, an analyst at NH Futures.

“The drop in the won/dollar exchange rate to the 1,290 won range largely reflects market participants’ expectations of a freeze in interest rates in June,” said Seo Jeong-hoon, a specialist at Hana Bank.

Dollar selling by exporters and heavy industry firms on the day also contributed to the fall of the won-dollar exchange rate. The recent expectations of an improvement in the semiconductor industry also seem to have led to the strength of the Korean won.

“Compared to the peak period of weakness for the Korean won from February to April, there is a growing expectation that the semiconductor industry has hit bottom, and with improved export sentiment, the pressure of a weak Korean won has significantly diminished,” said Baek Seok-hyun, an economist at Shinhan Bank. “While the Chinese government’s release of disappointing economic indicators had some negative impact on the Korean won when the Chinese yuan against the dollar fell below the 7 yuan per dollar threshold, the Korean won is once again facing upward pressure since last week due to China’s measures to boost market sentiment.”

The recent increase in foreign investors’ net buying in the Korean stock market is also related to the strength of the Korean won. On this day, foreign investors net purchased 480 billion won ($372 million) in the Kospi market and 99.6 billion won in the Kosdaq market.

Experts say the trend of a strong Korean won can continue for the time being. If the interest rate hike is frozen as the market desires at the upcoming Federal Open Market Committee (FOMC) meeting, there is also an expectation that the value of the Korean won could rise to the 1,270-1,280 won range. This is because the value of the Korean won has soared every time a decision indicating the end of monetary tightening was made at the FOMC meeting.

However, many forex experts say that unless the global manufacturing sector rebounds and the domestic current account improves significantly, the won is unlikely to rise to 1,250 won.

Considering the external conditions, it is difficult for domestic exports to improve. “If the U.S. continues to freeze interest rate hikes in July and sends signals of interest rate cuts due to a mild economic downturn at the end of the year, it is unlikely that the situation will lead to a sharp decline in the value of the Korean won to the 1,300 won range,” said Seo at Hana Bank.