To hear it from Rhee, the intent isn’t to reverse the slide in the local currency against the dollar or even about holding a line on trading screens. It’s about cushioning the won’s decline and preventing the tumble from worsening inflation. That’s a distinction often hard to manage in practice: Koreans have bitter memories of the hardships encountered during the Asian financial crisis of the late 1990s when the currency’s implosion led to a deep recession and the nation required a humiliating rescue from the IMF.
The Fed’s course has upended plans, pushing even early movers against inflation into more reactive positions and driving some embarrassing about-faces in forward guidance. In the case of Korea, Powell & Co. led Rhee to suspend intentions to move in quarter-point increments after a 50-basis-point increase in July.
Rhee was unusually candid after the big July hike and indicated smaller steps were now likely. He told the Peterson audience he had several points to get across: People shouldn’t overreact to the norm-busting, half-point step, and he wanted a sense of how previous increases were flowing through the broader economy. In addition, inflation and wage increases weren’t approaching levels in the US or Europe.
But global market gyrations tripped him up, specifically the acceleration in the dollar’s ascent after the Federal Open Market Committee’s September meeting, which projected higher rates ahead than anticipated. That shock exacerbated a slump in the yen that forced Japan to intervene to support the currency for the first time in a generation and made UK markets vulnerable to the reckless fiscal package that drew the…
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