The Federal Reserve (FED) recently announced that it will hold interest rates steady in May, along with the idea that the two rate hikes that had previously been expected in 2024 may not be realized. Furthermore, the Fed indicated that there may be only one rate cut this year or possibly even none.

South Korea closely monitors U.S. interest rates because the U.S. dollar is the key currency. When the FED raises rates, the dollar's value increases, leading to a depreciation of the Korean won against the dollar. This depreciation means that international transactions conducted in dollars become more expensive for South Korea, increasing costs for businesses and consumers alike.

Given South Korea's high dependency on trade, the use of dollars for invoicing imports means that higher dollar prices can lead to increased import costs and consequently higher product prices. Furthermore, higher U.S. interest rates can attract capital away from South Korea to higher-yielding markets, potentially causing capital outflows and financial market instability in South Korea.

However, there are also some benefits. When the dollar strengthens due to higher U.S. interest rates, South Korean exports can become more competitively priced in global markets. Yet, this advantage can be offset if the global economy slows down, reducing overall demand for exports.

Overall, the potential rate cuts or continued rate holds by the FED are closely watched, as these decisions significantly impact stock markets and financial stability worldwide. Thus, not only South Korea but also the global economy pays close attention to FED's announcements on interest rates.

L.L.F reporter Do-young Lee