Won hits two-month low on rate cut uncertainty, geopolitical risks

The won depreciated to its lowest point against the dollar in more than two months as bets on the Fed's early rate cuts softened.

Electronic display boards at Hana Bank in central Seoul show Korea’s markets on Wednesday. [YONHAP]

The won depreciated to its lowest point against the dollar in more than two months as bets on the Fed's early rate cuts softened and expanded geopolitical risks due to the victory of a U.S.-friendly leader in Taiwan led to increased demand for dollars.

The won weakened to 1,346.7 during trading on Wednesday, reaching the weakest level since early November. It was the first time the won broke 1,340 in two and a half months.

Such depreciation in the won followed hawkish remarks by influential Fed Gov. Christopher Waller who said the timing of the rate cut is foggy.

Waller acknowledged rate cuts lie ahead, but warned they should not be rushed.

“As long as inflation doesn’t rebound and then stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” Waller said in remarks prepared for delivery at a Brookings Institution event Tuesday.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added.

The remarks dampened expectations for a March rate cut, pushing the dollar to a one-month high on Wednesday against a basket of six major currencies, including the euro, Japanese yen and British pound.

Market expectations of a rate cut in March have eased to a 62.3 percent chance compared to a 76.9 percent in the prior session, according to CME’s FedWatch Tool.

Analysts cited escalated geopolitical risks triggered by the victory of U.S.-friendly leader Lai Ching-te in Taiwan as another reason for higher demand for the dollar, usually considered a safe haven currency due to its strong liquidity.

“Escalated geopolitical risks raised risk aversion sentiment in the financial market, weakening the won,” said Kim Yu-mi, an economist at Kiwoom Securities, in a report Wednesday. “Continued geopolitical risks, caused by the strikes by the United States and Britain against Houthi and the recent election in Taiwan, expanded the uncertainties.”

Kim added that “escalated tensions between Taiwan and China is weakening the Chinese yuan,” which the won reacted sensitively to because of the trade ties between the two nations.

China had described the latest election in Taiwan as “a choice between war and peace.”

The won traded at 1,344.20, down 12.4 won from the previous trading day, when the market closed Wednesday.

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