Korean market fluctuates on Fed signals to accelerate rate hikes

South Korea’s financial market fluctuated Thursday in response to the US Federal Reserve’s signal to raise its funds rate range three times next year. It was highly expected that the Fed was going to make a 0.25 percentage point hike in its December meetings that ended Thursday, but it was unexpected that the US central bank would tighten the monetary policy at such a fast rate.

Seoul’s main bourse Kospi opened 0.72 percent lower on the news Thursday morning, hovering below the 2,030 mark until just before noon.

The Korean won lost 11.2 won against the US dollar in the morning, starting trading at 1,180.5 won. 

Market observers say the Fed’s increase had limited impact on the Korean market since it was long anticipated. However, Federal Reserve Board Chair Janet Yellen’s hawkish stance would have significant impact in the near term.

“It is highly likely that the Federal Open Market Committee will turn more hawkish next year,” said Park Jeong-woo, a researcher at Korea Investment & Securities. “Markets that have been used to its dovish stance might need to suffer for a while.”

Most investors and market analysts had been betting that the Fed would increase its rates at the most twice next year.

If the Fed does raise its key interest rate for federal funds three times next year, the Fed rates would reach 1.5 percent, above Korea’s 1.25 percent.

The Bank of Korea, meanwhile, decided Thursday to keep its benchmark interest rate unchanged at the current level after the FOMC’s announcement.

Some analysts, however, still forecast that there would be no more than two rate hikes next year.

“The Fed had suggested four hikes this year, but there was just one,” said Jeon Byoung-ha, a researcher at eBest Securities.

Park Hee-chan, an economist at Mirae Asset Daewoo Securities, interpreted Yellen’s remarks as a high probability that the Fed would make a gradual rate increase, saying that the chair put emphasis on “gradual increases over the next few years.”

“The FOMC highlighted that market-based measures of inflation compensation have moved up considerably but are still low in its statement, which is a strong reason for gradual rate hikes, while it also noted growth in fixed investments by corporations remains sluggish,” Park said.

Due to the slightly eased market consensus about the Fed’s future movement, the Kospi later rebounded in the day.

The won, however, continued weakening against the dollar, reflecting worries about the quicker-than-expected monetary tightening by the US.

The Kospi closed at 2,036.65 on Thursday, down 0.01 percent from the previous trading session, while the won finished 10.5 won higher at 1,178.5 won against the dollar.

Meanwhile, Korean bond yields rose on concerns about the strengthening dollar. Three-year Korean Treasury bonds’ yields edged up 5.3 basis points to 1.697 percent Thursday, while one-year and five-year yields inched up 2.9 basis points and 5.0 basis points each.

Longer-term bond yields showed increases, too. The 10-year yields climbed 6.5 basis points, while 30-year yields rose 4.0 basis points.

Foreign investors tend to sell off long-term bonds and switch to bonds with higher interest rates, causing bond prices to fall and bond yields to rise.

By Song Su-hyun (song@heraldcorp.com)































송수현기자@heraldcorp.com