South Korean won hits 15-year low as hawkish Fed, domestic politics weigh

By Jihoon Lee and Yena Park

SEOUL (Reuters) -The South Korean won dropped to its weakest level in 15 years on Thursday, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty.

The won was quoted at 1,448.9 per dollar in onshore trade as of 0518 GMT, after opening the session at 1,453.0 per dollar, 0.96% lower than the previous day and the weakest since March 16, 2009.

The U.S. central bank cut interest rates on Wednesday, as expected, but Federal Reserve Chair Jerome Powell said more reductions in borrowing costs now hinged on further progress in lowering stubbornly high inflation.

U.S. central bankers now project they will make just two quarter-percentage-point rate reductions next year, half a percentage point less than anticipated in September, with higher projections of inflation for the first year of the new Donald Trump administration.

The hawkish stance pushed up the dollar and added to downward pressure on the won, which had already been weighed down by domestic political turmoil after impeached President Yoon Suk Yeol's short-lived martial law attempt earlier this month.

Taking into account the negative economic impact of the Dec. 3 martial law order, the Bank of Korea flagged on Wednesday downside risks to its economic growth forecasts for this year and next year.

So far in December, the won has weakened 3.9% against the dollar, extending losses for a third consecutive month.

The won, down 11% year-to-date, is the worst performing emerging Asian currency of the year and is set to record its worst year since 2008.

Prior to market open on Thursday, South Korea's finance minister said the government and the central bank would swiftly and boldly deploy measures to stabilise financial markets if volatility was seen as excessive.

"It is suspected that authorities are defending the 1,450 figure, making it difficult to short the won around the level," one local currency trader said.

To help ease pressure on the currency, the country's Financial Services Commission asked local banks to flexibly manage foreign exchange transactions and loans.

The Bank of Korea expanded its foreign exchange swap line with the National Pension Service, a market stabilising tool absorbing dollar demand stemming from growing overseas investment by the world's third-largest pension fund.

In the stock market, the benchmark KOSPI dropped as much as 2.5%, as foreigners sold local shares.

(Reporting by Jihoon Lee and Yena Park; Editing by Himani Sarkar, Muralikumar Anantharaman and Michael Perry)