Won-Dollar Rate May Fall to 1,050

The Korea Times

The Korea Times

National

Wed, November 29, 2023 | 21:49

Business

Won-Dollar Rate May Fall to 1,050

Posted : 2010-01-26 21:26

Updated : 2010-01-26 21:26

An influx of foreign money into the stock market and the possible re-valuation of the Chinese yuan is likely to cause the won-dollar exchange rate to fall to around 1,050 this year, a report said Tuesday.

By Cho Jin-seo
Staff Reporter

An influx of foreign money into the stock market and the possible re-valuation of the Chinese yuan is likely to cause the won-dollar exchange rate to fall to around 1,050 this year, a report said Tuesday.

Increasing sales in the shipbuilding industry and the low-interest policy of the U.S. government are other major factors that will keep the exchange rate volatile, a report from Samsung Economic Research Institute said.

The rising of the won's value reflects that the South Korean economy has almost recovered its strength since the global financial crisis, said Jeong Young-sik, author of the paper.

"When Lehman Brothers collapsed, Korea was at the epicenter of the foreign exchange crisis. It was a very volatile market, and many feared that it would default," he told The Korea Times. "Now, most economic indices are back to the pre-Lehman level. So we maintain our forecast of 1,100 won per dollar on average for the year, and that means it may fall as low as 1,050."

The exchange rate was around 1010 won per dollar before the financial crisis. It soared to almost 1600 in late 2008 and early 2009, as investors and some foreign media worried that South Korea would be unable to pay its debt in dollars. This caused more people to sell won and thus further pulled down the local currency's price against the dollar in a vicious circle.

The exchange rate began to calm down in line with the increase in Korea's foreign currency reserve and the growth of its economy. Jeong, the research fellow at Samsung, cites four factors that are likely to push up the won's value and thus further lower the exchange rate this year.

Four Key Drivers

The first reason is the very low interest rate in the United States, which is encouraging American investors to borrow money in dollars, exchange it to other currencies such as the won, and invest the money in local securities and banks. The so-called `carry trade' is creating continuous demand for won, and the fad is not likely to die out this year, he says.

The second factor is the re-valuation of the Chinese Yuan. The Chinese government is likely to raise the exchange rate of the Yuan against the dollar by up to four percent this year, Jeong says. "China is being blamed as the main culprit of a'global imbalance.' And data shows that the market players consider the Korean won and the Chinese Yuan in a same basket, so they tend to rise together whenever the Chinese government revalues its currency."

The two other factors are the increases of dollar influxes from foreign direct investment into financial assets and rebounding sales of sea vessels from Korean shipbuilders, which are paid in dollars.

The argument that all these factors will push up the won's value against the dollar is supported by many other researches. Some of the "more digestible" evidence comes from the so-called "Big Mac Index" by The Economist. Considering the price of a hamburger meal in South Korea in comparison to that in the United States, South Korea's won has the potential to rise for 20 percent against the dollar in the long term, the witty index showed.

Hot Money

Despite the increased foreign currency reserve, the exchange rate is still more vulnerable to external shocks and short-term exchange rate fluctuations than other major currencies are, because the foreign exchange market is not as efficient as in other countries, Jeong contends.

"The government needs to monitor the flow of 'hot money' in and out of Korea, but in the long term it needs to improve the basic structure of the market. Local financial firms also need to play the role of active market-makers, so that they can absorb such external shocks in the market,"he said.

Trading foreign currency for profit was banned in Korea until Feb. 2009. But several securities companies have started offering the service for customers only this year as the reaction from the market has been lukewarm.

cjs@koreatimes.co.kr