The Korean won briefly weakened past 1,350 per dollar on Wednesday as domestic stock markets plunged. Heavy foreign selling of Korean shares and dollar short-covering drove the currency lower, while above-forecast U.S. inflation data heightened caution over monetary policy.
The won closed daytime trading at 1,344.6 per dollar in the Seoul foreign exchange market on the 15th, down 6.3 won from the previous session. The currency opened at 1,342 and extended losses past the 1,350 level.
The immediate trigger was the slide in Korean equities. Both the KOSPI and the KOSDAQ fell more than 7% even after sell-side sidecars were triggered on each market. Foreign investors were heavy net sellers on the main board, adding to downward pressure on the won.
U.S. price pressures also supported the dollar. The U.S. core consumer price index rose 0.3% in September from a month earlier, above the 0.2% market forecast. According to the CME FedWatch tool, the probability of an October rate increase priced into federal funds futures jumped to 49.3% at one point on the morning of the 14th, up 27.2 percentage points from the prior session. The probability of no change fell 27.2 percentage points to 50.7%.
In Asian trading on the 15th, however, the won weakened further even as the dollar index, which measures the greenback against six major currencies, gave up its gains. Currency market participants attribute the move mainly to custody-related dollar buying tied to foreign equity sales and to short-covering by investors unwinding existing bets against the dollar. Given the scale of foreign selling, additional dollar buying linked to those trades could follow.
Market attention is now on whether the surge marks a break in the won's recent appreciation trend. In the near term, U.S. September producer price data, the Philadelphia Federal Reserve Bank's manufacturing index and weekly initial jobless claims, all due later in the day, are seen as the variables that will set the currency's direction.
