The U.S. Federal Reserve recently raised its interest rate by 2.5 percentage points, creating a significant difference between the interest rates of Korea and the United States. This difference, which has reached 2 percentage points for the first time in history, is expected to continue for quite some time. Despite concerns about increased volatility, the Korean foreign exchange market has remained calm and started at a low point in early trading. However, as a non-key currency country, Korea may face challenges due to the widening interest rate divergence with the United States. There is a possibility that foreign funds in the Korean stock and bond markets will leave in search of higher interest rates, leading to the depreciation of the Korean won.
Despite these concerns, the Korean foreign exchange market appeared unaffected on the day of the interest rate hike. The won-dollar exchange rate started at 1271.1 won, down 3.4 won, and remained in the 1,260 won range during early trading. The Korean government, the Bank of Korea (BOK), and financial authorities are optimistic about the stability of the exchange rate and the foreign capital market. Choo Kyung-ho, the Korean deputy prime minister and minister of planning and finance, stated that despite the prospect of widening interest rate differentials, the exchange rate has remained stable and foreign capital inflows have increased.
However, the BOK's challenges may escalate as the U.S. Federal Reserve Chairman, Jerome Powell, left open the possibility of another rate hike in September. If the interest rate divergence between Korea and the U.S. continues to widen and persist, the BOK will have to seriously consider resuming its tightening program. The BOK will closely monitor foreign capital flows and foreign exchange market volatility to make a decision on whether to raise the benchmark rate further on August 24.