Doubts Over Won's Rally Emerging as It Climbs for Fourth Week

  • Fed may be more hawkish next week, capping rally: strategist
  • Bank of Korea has cut economic growth and inflation forecasts

With South Korea’s won gaining for a fourth week amid signs of a stabilizing Chinese economy, strategists are questioning how much longer the rally can run.

The won has risen this month as data showed a nascent recovery in Asia’s largest economy and the Federal Reserve signaled a slower pace of tightening. Yet the dollar has recovered over the last two days as the market’s attention turned to the Fed’s meeting next week, while the Bank of Korea’s reduction of its growth and inflation forecasts raised the chance of an interest-rate cut in the coming months.

"There’s a risk the Fed might sound a bit more hawkish to prepare the market for a rate hike in June,” said Sim Moh Siong, a foreign-exchange strategist at Bank of Singapore Ltd. in the city-state. “Under that scenario the room for the won to further rally may be limited."

The currency rose 0.3 percent this week to close at 1,143.22 a dollar and declined 0.9 percent on Friday, data compiled by Bloomberg show. The won has rallied 0.9 percent in the past month, the best performance after Malaysia’s ringgit among emerging-market Asian currencies. It will drop to 1,178 by the end of June, according to the median estimate in a Bloomberg survey of analysts.

Futures are pricing in zero odds of a rate increase at the Fed’s next meeting, but the chance of one in June is now 20 percent, up from 14 percent a week ago.

Sim said he sees the won at 1,270 a dollar in 12 months as the Fed raises rates and longer-term concerns over China resurface. Credit Agricole CIB has recommended selling the won via forwards amid a more dovish Bank of Korea and signs of a pause in the emerging-market rally. Societe Generale SA said this week that stronger growth is needed for developing-nation currencies to gain further, and cyclical indicators show this is unlikely.

South Korea’s 10-year government bond yield fell three basis points this week and one basis point on Friday to 1.82 percent, Korea Exchange prices show. The three-year yield dropped four basis points from April 15 to 1.47 percent.

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