USD/KRW holds intraday gains around 1,480 as BoK advocates wait mode amid Iran risks
- USD/KRW trades higher near 1,478 as the South Korean Won weakens after the BoK leaves interest rates unchanged.
- BoK guides a wait-and-watch approach amid the Middle East war.
- Investors await the US CPI data and the outcome of US-Iran negotiations.
The USD/KRW pair holds onto its early gains around 1,478.00 during the Asian trading session on Friday. The pair trades firmly as the South Korean Won (KRW) weakens after the Bank of Korea’s (BoK) monetary policy announcement, in which the central bank left interest rates at 2.5%, as expected, and guided officials advocate a “wait and see” approach amid conflicts in the Middle East.
BoK Governor RHEE, Chang Yong, warned that the impact of the Iran war on the economic growth and inflation in South Korea is “bigger” than what we observed in the Ukraine war. RHEE added that it is favorable for the central bank to remain in a “wait and see” mode as the Iran conflict situation is too volatile.
Meanwhile, incoming Governor Shin Hyun-song has assured that stagflation is unlikely and Korea’s forex reserves are sufficient to buffer external shocks, Korean Economic Daily (KED) Global reported.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher around 98.88 ahead of the United States (US) Consumer Price Index (CPI) data for March, which will be published at 12:30 GMT.
On the global front, investors await the outcome of negotiations between the US and Iran over the 10-point peace proposal in Pakistan, which is scheduled for Saturday.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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