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Korean Won Holds Yellen-Inspired Gains After Interest Rate Decision

The Korean won gained nearly 1% against the US dollar yesterday and by doing so recorded its best day since April. USD/KRW ended the New York session at 1137.4. The move took the won’s 2017 gain against the dollar to 6%.

Against the euro, the won gained 1.4% – its best day since November – but the currency remains weak by recent standards and remains down on the year having suffered in the presence of a broad euro uptrend which began in April. EUR/KRW fell yesterday to 1296.8.

Against the Japanese yen, the won rose to a six-week high and is now buying ¥0.1.

On the economic calendar, the big news this week in South Korea was actually that coming today from the country’s central bank, who announced their decision on interest rates (unchanged at 1.25%). However, the aforementioned strength in Korea’s currency was driven by Federal Reserve Chair Janet Yellen, who made comments last night that were not as hawkish as some analysts had expected.

Yellen’s testimony to the US House Financial Services Committee forced all main Asian currencies higher – the Singapore dollar and the Japanese yen being the exceptions – but none did so well as the Korean won.

Yellen remarked that the Fed remained, as she saw it, on a path of gradual rate hikes, but she was also cautionary on inflation, saying that “there is…uncertainty about when and how much inflation will respond to tightening resource utilization.” She added that “considerable uncertainty always attends the economic outlook.”

The US Dollar Index closed unchanged after initially falling on Yellen’s testimony and then recovering.

Another part of Yellen’s testimony which favoured dollar-down, Asia-up was that in which she told the House Committee that the federal funds rate “would not have to rise all that much further” to reach a neutral level.

The hawkishness of decision makers at the Federal Reserve, or lack of it, will remain an important driver of Asian currencies, since this is indicative of the trajectory and pace of US interest rate hikes.

Asian currencies will typically fall in value all the while that interest earned on US dollar deposits is likely to increase faster than it will on Asian currency deposits. While this is the case, not only will movement in the interest rate differential favour the US currency, but also the dollar’s status as the world’s reserve currency makes it infinitely safer to hold than many of the Asian currencies. All things being equal, investors would prefer to hold dollars than, for example, won or ringgit or Taiwan dollars, and for this reason any measure of risk-adjusted potential returns will move strongly in favour of holding dollars and be suggestive of selling currencies like the won.

For those watching the won closely, also of interest this week will be Saturday morning’s South Korean trade data, released at 9am in Seoul. Investors will learn the export, import and trade balance figures for June.

Readers can save big on exchange rates when changing money into or from Korean won, as well as a host of other Asian currencies, by using BestExchangeRates’ online comparison calculators for travel cash and foreign currency transfers.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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