Korean won nears 1,200 threshold vs USD, FX reserve in Dec declines

2022.01.05 09:11:32 | 2022.01.05 10:05:13

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The South Korean won continues to skid in the new year, nearing the psychologically-important 1,200 versus the U.S. dollar strengthening globally on anticipation of faster rate increases in the U.S. to contain runaway inflation.

The U.S. dollar closed at 1,194.1 won on Tuesday, down 2.3 won from the previous session’s finish. It broke above 1,190 won as soon as the market opened for the new year after stagnating around 1,180 won in December.

The dollar moved further up to 1,197 won in early Wednesday in Seoul.

The sharp weakening in the Korean currency hinged on the greenback’s strengthening on rising expectations for faster rate increases by the U.S. Federal Reserve after the consumer price index high a 39-year high of 6.8 percent in November. The Fed was previously expected to raise rates from the second half after it winds up tapering in bond purchase program. But the move is expected to fasten in the first half.

“Inflation is unlikely to soften given the protracted bottleneck in the global supply chain,” said Seo Jeong-hoon, researcher at Hana Bank.

The greenback also was enhanced by geopolitical risks due to escalating conflict between the U.S. and China for the U.S.-led boycott of the Beijing Olympics.

Seo said that geopolitical risk concerns such as the Olympics boycott issue and rising tension between Russia and Ukraine are affecting the foreign exchange market.

Experts bet the Korean won will try to break the key psychological level of 1,200 catches up with.

Min Kyung-won, an economist at Woori Bank, said that the won has yet to test the bottom. “The market could stabilize if the Kospi catches with the gains in the U.S. markets,” he added.

Authorities have warned of smoothing operation should the won’s volatility deemed excessive.

Foreign exchange reserves, meanwhile, fell for the second straight month in December after the peak at $469.2 billion in October.

According to data released by the Bank of Korea on Wednesday, the country’s foreign exchange reserves reached $463.12 billion by the end of December, down $790 million from $463.91 in the previous month.

The central bank said that overall foreign exchange reserves declined due to principle payment of foreign currency foreign exchange stabilization bonds despite a rise in U.S. dollar value of foreign-denominated currencies.

Securities gained $750 million to $421.69 billion in December while special drawing rights (SDR) from the IMF rose $20 million to $15.37 billion.

Deposits, however, fell $1.56 billion to $16.63 billion. International Monetary Fund (IMF) position, or serve tranche purchases a member may claim from the IMF, remained unchanged at $4.63 billion.

Gold holdings also were unchanged at $4.79 billion.

Korea was the ninth-largest holder of foreign exchange reserves as of end of November. China was the largest holder with $3.2 trillion, followed by Japan with $1.4 trillion, and Switzerland at $1.08 trillion.

By Kim Yoo-shin and Lee Eun-joo

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