By Lee Hyo-sik Staff Reporter

The won is expected to remain weak against the dollar and other major currencies for the foreseeable future as foreign investors will likely continue taking money out of the country amid the worldwide financial market instability as a result of U.S. subprime loan defaults earlier this month, analysts said.

They say global investors, who borrowed low-interest yen-denominated loans to invest in stocks and other assets for higher returns, are increasingly withdrawing investments from the local securities market to pay off loans to avoid higher interest burdens, further weakening the won's value.

The won has lost ground against the dollar and the yen over the past few weeks as foreign investors dumped local stocks in search of safer assets elsewhere amid growing global financial market uncertainties.

The local currency closed at 949.7 won to the dollar on the local foreign exchange market on Aug. 20, hitting the four-month high as investors sold won to buy dollars. The won closed at 832.96 won to 100 yen the same day, sharply up from the 10-year low of 744.8 won on July 9 over the possibility of the abrupt end of the yen-carry-trade.

Before the U.S. subprime loan crisis hit the global financial market hard this month, the local currency appreciated 8.8 percent against the dollar in 2006 and appreciated another 1.1 percent this year. In contrast, the yen depreciated 0.7 percent against the dollar in 2006, and lost its value nearly 3 percent since the beginning of the year.

Even though the won has gained some ground since Aug. 20, most analysts forecast the won's weakness will continue for the time being until concerns about the U.S. subprime mortgage defaults ease.

Shin Min-yong, a senior economist at the LG Economic Research Institute, said the yen and the dollar have been strengthening against the won rapidly this month as more investors sold won amid sharp stock market corrections across the globe. ``For quite some time, capital outflow from the South Korean market will become stronger as investors move to withdraw their investments in the local securities market to pay off their debts, or to relocate their global investments.''


Yen-Carry-Trade

The so-called yen-carry-trades, or the borrowing of yen at low interest rates in Japan to invest in higher-yielding currencies and assets elsewhere, have eased amid increased risk aversion by investors in the wake of the U.S. subprime mortgage crisis.

Shin said the yen-carry-trade has boosted the supply of the yen on the local currency market, strengthening the won's value against the Japanese currency. ``However, with the ongoing corrections in the Korean as well as other global stock markets, a fewer investors are borrowing the yen from Japanese banks for equity investments.''

Also, a growing number of investors are withdrawing investments in the emerging markets to pay off yen-denominated loans strengthening the yen against the won, he said.

Cho Hyun-suk, a dealer at the Korea Exchange Bank, said the won's volatility will likely stay that way for the time being as the international financial market is expected to remain unstable at least until the beginning of the year.

``Many analysts predict that the market uncertainty will persist for quite some time and that the won won't be gaining strength against the dollar in the near future as investors continue to prefer safer assets,'' he said.

Kim Seong-soon, a currency dealer at the Industrial Bank of Korea, also expects the yen to strengthen against the won and other currencies as the yen-carry-trade is likely to lose momentum amid increasing volatility in global equities and other assets.

``As the yen-carry-trade is losing strength globally due to U.S. subprime woes, demand for the dollar and the yen is surging in emerging markets, including South Korea,'' he noted.

Kim warned that local businesses should refrain from borrowing the yen from Japanese banks as it will likely continue to gain ground against the won and other currencies until risks associated with U.S. subprime loan defaults are resolved. A stronger Japanese currency raises interest costs for yen borrowers.

Also, Samsung Economic Research Institute said in a recent report that companies should exercise restraint in taking out yen-denominated loans. ``The Bank of Japan will also likely raise key interest rates in the second half, further weakening the yen-carry-trade,'' it said.


Government Wants Weak Won

However, government officials do not seem to be concerned about the won's rapid fall in values against other currencies, only stressing that the end of the yen-carry trade will have a limited impact on the local financial market.

``The size of the yen-carry trade is projected to reach nearly $200 billion worldwide. But we expect the impact (from the yen-carry trade liquidation) on the local financial market to be limited as the yen-carry trade investment in the country is estimated to be only $6 billion,'' Vice Finance and Economy Minister Lim Young-rok said.

Shin of the LG Economic Research Institutes said government officials want the won to depreciate further as the weaker won boosts the price competitiveness of Korean-made goods in overseas markets. 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.

``The government has introduced a series of measures to encourage the outflow of dollars from the country over the past few years as Korean exporters have lost their international market share to their rivals on the global market because of the strong won,'' he said.

The won was strong against the greenback over the past few years on globally weak dollar sentiment and the ample supply of dollars on the local foreign exchange market.


Measures to Weaken Won

The government has taken a number of steps to help boost the outflow of dollars amid a strengthening won that is weakening the price competitiveness of Korean goods in overseas markets.

It has eased restrictions on overseas investment and provided incentives to those investing in foreign securities and real estate. The government has exempted the taxing of capital gains on indirect investments in foreign securities through brokerage houses and trust companies for the next three years, while allowing state-run funds, including the National Pension Fund, to directly invest in foreign stocks and bonds.

Also, earlier this month, the Bank of Korea (BOK) placed a restriction on the use of foreign currency loans by companies and individuals in a bid to curb the won's appreciation and rising short-term foreign borrowings.

It requires local lenders dealing with foreign currencies not to extend foreign currency-denominated loans to those who convert foreign money into the won or use loans for purposes that are not stated previously. Such foreign currency loans are blamed for the increase in the supply of dollars in the local foreign exchange market and further hike the won's value.

mailto:leehs@koreatimes.co.kr