(Bloomberg) -- South Korea's won dropped to the weakest level in more than 17 months as traders geared up for a quicker pace of U.S. interest-rate hikes and North Korea test-launched another ballistic missile.
The won fell as much as 0.4% to 1,201.10 per dollar, the lowest since July 2020, as traders awaited the release of U.S. December payroll data due Friday which may back the case for the Federal Reserve to speed up the pace of policy normalization. A report saying North Korea's missile appeared to be “hypersonic” also dented sentiment toward the won.
“The won's weakness is expected to ease soon,” as China's yuan -- which Korea's currency closely follows -- will attract bullish bets in the first quarter, said Min Gyeong-won, an economist at Woori Bank in Seoul. Central banks in countries including the U.K. and New Zealand will normalize their monetary policy faster than the Fed, a move that will push the dollar down and send the won to as high as 1,150, Min added.
South Korea's currency is starting the new year on the back foot after sliding over 8% in 2021, as investors bet that Fed rate increases will damp the appeal of emerging-market assets. The breach of the psychologically important 1,200 mark is also significant, with the won having weakened past the level during the height of the pandemic in 2020.
The won pared the loss to trade 0.2% weaker at 1,199.15 as of 9:57 a.m. local time.
The won's drop is expected to be capped and the currency will move within a narrow range of 1,150-1,200 levels for the time being as traders watch out for authorities jawboning along with further Fed remarks, said Kim Yumi, a market strategist at Kiwoom Securities Co. in Seoul. “While vigilance has risen against the Fed's normalization process, it is not an emergency yet,” she said.
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