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By Lee Kyung-min
The Korean won is expected to continue to lose value against the U.S. dollar in the coming months, according to analysts, Friday.
The local currency fell to a yearly-low against the U.S. dollar Friday at 1,170 won against the greenback, down 5.5 won from the previous close, the lowest level in 27 months since it ended at 1,169.2 won.
However, the currency is feared to further drop to 1,200 won against the U.S. dollar due to heightened geopolitical risks surrounding the Korean Peninsula after North Korea fired unidentified short-range projectiles into the East Sea, April 4.
According to the Korean Central News Agency, Sunday, North Korean leader Kim Jong-un supervised the "strike drill of defense units in the forefront area and on the eastern front which took place in the East Sea of Korea."
Market analysts expect that the won-dollar exchange rate will become highly volatile for the time being as Korea's economic slowdown is coinciding with the strengthening of the dollar driven by the recovery of the U.S. economy.
The Korean economy contracted 0.3 percent in the first quarter from the quarter before, the worst performance in a decade since the fourth quarter of 2008. In contrast, the U.S. economy grew 3.2 percent during the same period.
"The won will continue this downward trend after the country's economy contracted in the first quarter ― the worst data since the global financial crisis," said Heo Jeong-in, an analyst at NH Futures said.
"The U.S. dollar, by contrast, will see a continued upward pressure, further bolstered by its strong economic data," she added.
Among 16 major currencies, the won suffered the steepest monthly drop against the U.S dollar, hit by the country's economy contraction.
According to Bloomberg data, the won closed at 1,167.90 per dollar on April 30, a 2.82 percent decline from the end of March.
Heo forecast that the won may further drop to 1,200 won in the coming months, which she expects will cause a sudden capital outflow.
In this case, she said that the financial authorities will have to intervene as part of smoothing operations.
"The BOK may seek preventative measures before any significant market dislocations occur," she said.
"The currency will not see any steep plunge for the time being, but will continue to weaken against the greenback."
Moon Jung-hiu, a senior economist at KB Securities, concurred.
"The won has lost a whopping 20 won in only about two weeks, mostly out of concern that Korea will have to face harsher economic conditions," he said.
"The market is still absorbing shocks from the first―quarter economic contraction. We are in the process of reassessing the outlook for won-dollar rate."
Finance Minister Hong Nam-ki told reporters recently that the government is keeping a close watch on the won's movements as the won-dollar exchange rate is becoming more volatile.
"The government will take necessary measures if there is any unusual, excessive fluctuation in the market," he said.
Kim Yu-mi, a senior economist at Kiwoom Securities, said the strong economic sentiment in the U.S. will keep strengthening the world's largest economy's currency.
"The fundamentals of the U.S. will maintain a positive outlook for the time being, providing momentum for the greenback to stay strong," she said.
The worse-than-expected first-quarter data fans expectations that the BOK will lower the key interest rate, he added.
"Coupled with the woeful economic indices, long-term interest rates are on a continued decline, an indication that expectations are growing among market participants that the central bank will consider lowering the key rate," he said.
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