"Ultra Step": Won Tumbles Against US Dollar

Alex Kil | November 14, 2022

Illustration courtesy: SeuMin (Caren) Kim

The U.S. dollar price has simply gone out of control. For the first time in 13 years, the U.S. dollar has soared to over 1,400 won (Seoul News). The main reason behind the increase is the "ultra step", an economic term unique to South Korea that refers to the U.S. Federal Reserve Board (the Fed) increasing the interest rate to 1.00%. But what led the Fed to do so, and what are the consequences for South Korea?

The Fed has an interest in keeping U.S. inflation stable, and its decision to raise the interest rate reflects that goal. In recent years, inflation - rising prices of goods and services - has been key in driving interest rates up. Interest rates are a key factor in determining how much money U.S. citizens spend: when the interest rate is low, spending increases, but when the interest rate is high, people spend less with borrowed money to avoid paying higher returns.

Currently, the U.S. faces huge inflation, which could lead to the loss of the U.S. dollar's purchasing power if left unchecked. Therefore, in order to deal with the ongoing inflation, the Fed decided to increase the interest rate, hoping to decrease the demand for goods and services and in turn, to decrease prices as well.

Unfortunately, though the Fed's decision may have been the right call for America, it has caused various side effects elsewhere around the globe, including in south Korea. Because increased interest rates have led many to invest in the U.S. dollar, it has grown much stronger at the expense of other currencies, like the Korean won.

A crucial issue is that the rise of the U.S. dollar has increased the prices of goods globally. For example, the prices of Korean staple foods such as kimchi and ramen have increased about 10% to prevent losses caused by the increase in dollar price (Seoul News). Furthermore, as Korean businesses were already suffering major losses due to the effects of Russia's war in Ukrainian, this means that businesses will find it challenging to survive.

The Bank of Korea hopes to increase its interest rate to match the moves by the Fed, but this strategy may not be enough. If the South Korea central bank does not find an effective response, an economic crisis may result (Bloomberg). Therefore, an effective solution must be determined - quickly.