South Korea is encountering inflation concerns due to the depreciating value of its currency, the won, against the U.S. dollar. This has resulted in an almost 8% fall in the currency this year, triggering anxieties about rising costs of goods and services.
The decrease in the won’s value signifies a rise in the cost of importing goods and services. It also impacts the country’s cost of living and consumer price index. Economists suggest that this high inflation could impose significant pressure on the South Korean economy, inciting possible increases in interest rates.
Furthermore, the country’s export competitiveness may be jeopardized as a weaker won could make South Korean goods more expensive to international buyers. Analysts are increasingly concerned that these developments may affect South Korea’s economic growth and stability.
Reactions from the U.S. Federal Reserve, including halting the rate-cut processes, significantly shaped South Korea’s monetary policy.
South Korea’s inflation battle due to currency depreciation
This has resulted in a more cautious approach to fiscal policy, considering the global economic landscape.
If the U.S. Federal Reserve does not soften its policy before the Korean Central Bank, a fall below 1,400 won could potentially cause a significant ripple effect on the Korean financial market. Substantial instability may hit the stock market, and the ripple effect may extend to the international macroeconomic landscape.
Chang Min, a research fellow at the Korean Institute of Finance, anticipates that the widening Korea-U.S. rate disparity might cause a considerable price movement in the foreign exchange market, and thus keep the exchange rates unstable.
The benchmark rate in Korea currently stands at 3.5 percent, while in the U.S., it ranges between 5.25 percent and 5.5 percent. The progress of the Korean currency heavily depends on whether the Fed’s rate cut precedes that of the Bank of Korea.
The value of the won against the U.S. dollar has seen a roller-coaster ride over the past year. After stabilizing at the 1,350 won mark in the previous month, it plummeted to 1,390 won. However, the outcome of the next monetary policy meeting of the Bank of Korea scheduled for July 11 will be pivotal in determining the future trajectory of the Korean currency.
