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An End to the Continued Interest Rate Hike?

Posted December. 15, 2005 08:59,   


The won-dollar exchange rate in Seoul’s exchange market dropped almost 10 won yesterday from the day before. The change was due to expectations that the value of the dollar, which remained strong thanks to the interest rate hike, would become weak.

An End to the Continuing U.S. Interest Rate Hike?-

The U.S. Fed’s rate hike was already predicted. Economists at home and abroad were more interested in how the expressions in the Federal Open Market Committee (FOMC) statement would change than in the raise itself.

As the economists expected, the FOMC eliminated the expression “accommodation.” This was a departure from the past practice of raising the rate, stating, “Policy accommodation can be removed at a pace that is likely to be measured.”

Experts interpreted, “The Federal Reserve Board (FRB) recognized that the interest rate approached a ‘neutral level,’ which neither boosts nor undermines economic growth.”

However, the FRB left open the possibility of additional raises by saying, “With appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.”

That is interpreted as a measure to ease the shock of a sudden change in policy line on the market.

Park Jong-kyu, a researcher at the Korea Institute of Finance, said, “All in all, the statement appears to signal that the interest rate would not soar,” adding, “I suspect that the rate will be raised at least once.”

Federal Reserve Board Chairman Alan Greenspan, who took the lead in raising the rate, will step down to be succeeded by Ben Bernanke, after presiding over a FOMC meeting late next month.

Influence on Korea?-

After seeing the rate hike in the U.S., experts highlighted the fact that the “end of raises” is in sight over the raise itself.

It is similar to the sharp decline of the long-term market interest rate after the Bank of Korea said, “The urgency of raising the rate has dropped,” when raising the overnight call rate by 0.25 percentage point on December 8.

The Fed rate hike had an immediate and significant impact on the exchange market.

That was because of the expectation that the value of the U.S. dollar would remain strong thanks to the sustained interest rate hike despite the enormous twin deficits (trade and budget deficits).

The yen-dollar exchange rate, which recently went up to the 121 yen range, nose-dived to the 118-yen range yesterday.

The closing won-dollar exchange rate yesterday was 1,016.4 won, a 9.6 won drop from the day before, and the four-month low since August 16 (1,016.4 won).

Some foreign exchange dealers expected that, if the trend continues, the won-exchange rate could drop below the 1,000 won mark within this year.

However, Byun Myung-kwan, manager of Choheung Bank, predicted, “Considering that it is the year-end when speculative demand is low, it is hard to expect a big drop in the dollar.”

In the bond market, the closing rate of government bonds with three-year maturity was 4.94 percent annually, a 0.1 percentage point fall from the day before. That was influenced by the long-term interest rate decline in the U.S. on the expectation that the country’s interest rate hike will end soon.

Jin-Young Hwang Jong sik Kong buddy@donga.com kong@donga.com