Impact of China Evergrande and US FOMC... Exchange Rate Surpasses 1185 Won, Highest in About a Year (Comprehensive)

Bank of Korea Holds Morning Situation Review Meeting
Lee Seung-heon, Deputy Governor: "US Monetary Policy Normalization May Accelerate Faster Than Expected"

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] The won-dollar exchange rate has risen by more than 10 won compared to just before the Chuseok holiday, surpassing 1,185 won. The intraday high has also been significantly exceeded.

On the 23rd, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,183.0 won, up 8.0 won from the previous trading day, and has been on an upward trend. As of 9:54 a.m. that day, the won-dollar exchange rate was trading at 1,185.78 won, surpassing the 1,185 won level. Accordingly, it exceeded the intraday high of 1,181.10 won (August 20) and is recording the highest level since September 14 of last year (1,187.50 won) based on the intraday exchange rate.

During the Chuseok holiday, risk concerns over China’s real estate developer Evergrande Group intensified, strengthening the preference for safe-haven assets, and the dollar strengthened around the Federal Open Market Committee (FOMC) meeting, which also contributed to upward pressure on the won-dollar exchange rate. During the Chuseok holiday, the offshore market saw the won-dollar exchange rate surge to as high as 1,190 won.

During the Chuseok holiday, rumors of Evergrande Group’s bankruptcy circulated in the market. Although it was announced that interest on some bonds would be paid on time, one day before the bond interest payment date, the bankruptcy rumors have not easily subsided. This is because the interest amount promised to be paid on time is less than half of the total. Credit rating agencies’ forecasts that the Chinese government will not support Evergrande are also fueling the bankruptcy rumors. As a result, the offshore yuan value fell to its lowest level in about a month. Recently, as China’s economic influence on Korea has increased, the yuan and won values have shown a synchronized trend, causing the won value to fall as well.

Furthermore, the dollar’s strength around the FOMC meeting increased the won-dollar exchange rate’s rise. This is because the FOMC results were interpreted as somewhat hawkish (favoring monetary tightening). Jerome Powell, Chair of the U.S. Federal Reserve (Fed), stated that tapering (asset purchase reduction) could be decided at the next meeting, and the timing of the base rate hike on the dot plot was moved forward to next year. Accordingly, the dollar index, which shows the dollar’s value against six major currencies, surged from the mid-92s last week to the 93 level.

Moon Hongcheol, an analyst at DB Financial Investment, said, "During the holiday, Evergrande’s impact pushed the won-dollar exchange rate up by about 5 won, and the overnight dollar strength due to the FOMC pushed it up by another 5 won." He evaluated that Evergrande and the FOMC each influenced the won-dollar exchange rate by about half. He also forecasted, "The exchange rate could touch 1,200 won in the future."

Meanwhile, the Bank of Korea stated that it would strengthen monitoring as volatility in domestic and international financial markets could increase due to the FOMC results and the Evergrande Group situation. On the morning of the same day, the Bank of Korea held a ‘Situation Check Meeting’ chaired by Deputy Governor Seunghun Lee and said, "The U.S. FOMC results largely met market expectations, but attention should be paid to the possibility that the pace of the Fed’s monetary policy normalization could accelerate faster than expected, such as the earlier timing of tapering."

It added, "Although the prevailing assessment is that the Evergrande Group crisis is unlikely to spread as a systemic risk to the international financial market, since the issue of accumulating real estate-related debt has become a reality, there remains a possibility that financial market volatility could expand depending on how the situation develops."

Furthermore, the Bank of Korea emphasized, "As volatility in domestic and international financial markets could increase depending on changes in the monetary policy stance of major countries such as the Fed and the development of the Evergrande Group situation, we plan to strengthen monitoring of financial market risk factors and continuously review response measures."

This content was produced with the assistance of AI translation services.