By Lee Hyo-sik
Staff Reporter
The won is projected to gain further against the dollar going forward on expectations that more interest rate cuts by the U.S. Federal Reserve will further weaken the value of the greenback on global currency markets.
Currency dealers say the won along with the euro and other major currencies will strengthen against the dollar as the sluggish U.S. housing market, a result of subprime loan defaults, will slow the world's largest economy.
They also say the prospect of more U.S. rate cuts, aimed at propping up its economy, is reducing international investors' appetite for U.S. assets, adding further downward pressure to the dollar on the global foreign exchange market.
Analysts do not rule out the possibility of the won-dollar rate falling below 900 toward the end of the year.
The won closed at 913.90 won to the dollar Tuesday, up 0.2 won from a day earlier. But on Monday, the local currency closed at 913.70 won against the dollar, rising 1.4 won from last Friday, the strong level for the won since Oct. 2, 1997 when it closed at 913.50.
A stronger won makes Korean goods expensive on overseas markets and erodes exporters' earnings. The worsening business bottom line will also lead to a drop in corporate employment and investment, negatively affecting domestic consumption. But a strong won is a bonanza for Korean tourists abroad.
``U.S. central bank's decision to lower a key interest rate to 4.75 percent from 5.25 percent last month accelerated the dollar's weakness against the won and other currencies. Currency dealers and companies are betting that the U.S. will further cut the rate to boost its economy amid growing signs that the U.S. subprime mortgage defaults are spreading to the broader economy,'' said Cho Hyun-seok, a currency dealer at the Korea Exchange Bank (KEB).
He also said currency traders and central banks across the globe are increasingly trying to reduce their dollar holdings and stay away from dollar-denominated assets, further weakening the greenback.
``The dollar will remain weak at least throughout the year and possibly for the next two years as the U.S. economy is forecast to slow down. Unless the U.S. finds ways of curtailing huge fiscal and trade deficits, it is unlikely that the greenback will gain upward momentum because increasing U.S. deficits will continue to flood the global currency market with dollars,'' Cho said.
If the current trend continues, he expects the won to appreciate as high as 900 won toward the end of the year.
Shin Min-yong, a senior economist at the LG Economic Research Institute, said there are no factors that can boost the dollar at the moment, adding the dollar will continue to remain bearish as the U.S. economy will slow for the remainder of the year and beyond, affected by the stagnant housing market and the unstable credit market.
He expected the won-dollar rate to drop below 910 in the near future unless there is a significant shift in market sentiment, adding that most currency market participants are betting on the weak dollar.
``Also, other than verbal intervention, it will be difficult for the government to actually meddle in the market to help stop the won's appreciation, as it has incurred a huge amount of losses over the years because of interest payments on foreign exchange stabilization bonds and foreign exchange losses,'' Shin said.
``Coupled with the U.S. economic slowdown, a stronger won could hit domestic exporters hard. To cope with the weakening dollar, companies should try to receive payments for goods shipped abroad in euro, yen and other foreign currencies rather than in dollars,'' Shin said.
He also suggested that to better deal with increasing volatility in the foreign exchange rates, companies place a greater focus on enhancing productivity and developing creative and state-of-the-art products through advanced technologies.
leehs@koreatimes.co.kr
