Won expected to extend gains against dollar

A bank teller counts 100 dollar bills at KEB Hana Bank headquarters in downtown Seoul, in this Oct. 10 file photo. Korea Times photo by Choi Heung-soo

Local currency strengthening on recovering economy

By Yoon Ja-young

Korean currency is continuing to strengthen against the dollar. Analysts explain that economic recovery and inflow of foreign funds to the stock market are pulling up its value.

The Korean won closed at 1,097.5 to the dollar, Friday, down 3.9 won from the previous day.

It has jumped nearly 9 percent in value since Jan. 2 when it traded at 1,208 won to the dollar. It has been appreciating especially steeply recently, gaining 4 percent since October.

Analysts explain the strong economic recovery is behind the appreciation.

"The momentum for economic growth was better than what the market had expected," said Jeong Won-il, an economist at Yuanta Securities, adding that the value of the Korean currency depends more on the country's economic momentum than inflation or the interest rate.

"Despite various obstacles, the economy achieved 3.6 percent growth in the third quarter compared with a year ago, and the won/dollar rate moved to a level that suits the economic growth."

The economy marked 1.4 percent growth in the third quarter from the previous quarter, which is the highest since the second quarter of 2010.

Park Sang-hyun, chief economist at Hi Investment and Securities, also cited positive expectations of the economy as the main drive.

"Credit rating agencies as well as the International Monetary Fund (IMF) have positively evaluated the economy, helping the Korean won gain more value."

The IMF pulled up its 2017 growth outlook on Korea to 3.2 percent from its previous estimate of 3 percent. The consensus of nine global investment banks on Korea is 3 percent, which is 0.2 percentage points higher than their estimates a month ago.

The expectations that the central bank will raise its key rate this month also reflects positive evaluation of the economy.

Analysts point out that the currency swap deal with Canada, which has a key currency, also contributed to the strong won. "It will be evaluated as further strengthening the financial safety net for Korea," Park said.

He also points out the won has appreciated notably while other emerging currencies have been weakening recently. This has to do with North Korea.

"North Korea has stopped provocations for more than 60 days, alleviating geopolitical risks. Resolving the conflict with China over the THAAD through the Korea-China summit and the signs of tension between North Korea and the United States somewhat easing also lessened geopolitical risks involving North Korea."

He pointed out that U.S. President Donald Trump refrained from making remarks provoking North Korea while visiting Asian countries. The United States hasn't re-listed North Korea as a state sponsor of terrorism yet.

Foreign funds, which deserted the Korean market due to geopolitical risks, are returning to the Korean bourse. Foreigners bought 3.2 trillion won worth of stocks in Seoul last month.

"Recently, foreign funds have been entering the KOSDAQ, further strengthening the Korean won," Park noted.

Most analysts expect the Korean currency to continue to be strong for the time being.

"Jerome Powell, who will be inaugurated as the U.S. Fed chairman, is dovish. While the Fed is unlikely to change its key rate hike policies, the pace could slow down. The won/dollar rate will face downward pressure on growing expectations that the U.S. Fed will take a dovish policy," said Kim Moon-il, an economist at HMC Investment and Securities.

China, where economic indicators seem to be falling from its peak, will also affect the Korean won.

"If China's foreign exchange reserve falls to below $3 trillion, the People's Bank of China may appreciate the yuan against the dollar to stabilize market sentiment. That will add to downward pressure on the won/dollar rate."

He added that investors will increase purchases of the euro while selling dollars if the euro/dollar rate continues rising, which also will push the won/dollar rate down.

"As the global economy continues improving, demand on risk assets is likely to increase more than on safety assets," he said, adding that the dollar is a safety asset while the euro is closer to a risk asset.

"If the euro strengthens, the won/dollar rate will face downward pressure due to preferences for risk assets," he added.

"U.S. President Donald Trump puts priority in improving manufacturing and decreasing the U.S. trade deficit. For that, the dollar should depreciate against major currencies," he said, pointing out how Trump had criticized Japan, Germany and China as currency manipulators early this year. "That's because strengthening of the dollar against these currencies negatively affects U.S. exports. Jerome Powell is likely to take a similar stance with President Trump in monetary policies, which will justify a weak dollar against major currencies."

However, some analysts are cautious about further strengthening of the won.

"The expectations of the economy have diminished a lot compared with the beginning of the year, with domestic consumption contributing less to economic growth than before. The won is likely to remain at its current level rather than strengthening," Jeong at Yuanta Securities said.

The government is not likely to strongly intervene in the foreign exchange market since it has a different perspective on the won/dollar rate. Kim Doo-un, an economist at Hana Investment and Securities, said the government doesn't seem to have notably changed its stance despite steeply strengthening Korean currency.

"For the Moon Jae-in administration which seeks income-led economic growth, a strong won is not bad," he noted. A strong won may be helpful as it enhances purchasing power of domestic consumers.

It contrasts with former conservative administrations which aggressively coped with the strong won.

Park at Hi Investment and Securities also expects the won to continue strengthening, though the won/dollar rate may rebound due to temporary strengthening of the dollar or smoothing operations by the Korean authorities. "The rebound will be limited," he added, citing the global economic cycle and recovery of the Korean economy.

The government may intervene if the won strengthens too much since it can harm exporters. But the damage on exporters may not be huge, according to Park.

"There is concern over exporters losing their competitive edge, but when considering that the global trade cycle is normalizing, exports are not likely to slow down."

He added that other emerging currencies are also likely to strengthen when considering their economic cycle. It means Korean exporters' relative competitiveness won't be damaged as much.

He agreed that the strong won is likely to contribute to the recovery of domestic demand, which the Moon Jae-in administration is focused on.

"Expectations on further strengthening of the Korean currency will lead to additional inflow of foreign funds. With the government ready to expand its support of the Kosdaq, the appreciation of the Korean won will lead to further purchases of Korean stocks by foreigners," he said, expecting the strong Korean won to work positively on the economy and the financial markets.