The local currency is on an upward march against the U.S. dollar, sounding the alarm for the nation's exporters. It continued to rise for the fifth day in a row, closing at 1,136.4 won per dollar Thursday, up from 1,164.5 won at the end of last year. That is, the won gained 2.4 percent during the first four business days of the New Year, hitting a 16-month high.
Considering South Korea's better-than-expected economic performance, the strengthening won is not surprising news. In fact, the Korean economy has rebounded well from the recession caused by the unprecedented global economic crisis in 2009. It would not have been possible for the nation to rapidly emerge from the worldwide turbulence if it had not taken advantage of the steep depreciation of its currency that plunged to 1,570.3 won against the greenback on March 2.
The weak won helped the nation enjoy an unusual export boom for Korean products abroad. Its trade surplus was estimated to reach a record high of $41 billion last year. However, this trend cannot be maintained anymore due to mounting pressure for a higher won. It is natural to see the local currency regain its strength in the wake of the economic recovery.
At present, the nation is awash with abundant supply of dollars mainly thanks to the trade surplus and the inflow of foreign investment into Korean stocks and bonds. For the last four days, foreigners bought about 1 trillion won of local stocks, adding fuel to the appreciation of the won. It seems to be only a matter of time before the currency breaks through the 1,100-won level.
In late December, the state-funded Korea Development Institute (KDI) predicted that the local currency would rise to an average of 1,054 won to the greenback in 2010. The think tank even said it would reach the 900-won level in 2011. On the global financial market, the dollar is also expected to maintain its weakness for the time being as international investors are rushing to buy other currencies and stocks of emerging market economies.
Many businesses fear that their exports might suffer a setback if the won goes up further. They could inevitably see their export volume dive as their products would be unable to compete on world markets. But they should keep in mind that the exchange rate is a double-edged sword. The continuing appreciation of the won will certainly weaken the competitiveness of the export industry. But it will allow the country to import crude oil and other raw materials at cheaper prices, thus helping stabilize overall prices.
What's important is how to minimize the negative effects of the stronger won. Local companies had better adopt more aggressive strategies of reducing production costs and improving their product quality. For this, they are required to push managerial innovation and invest more in research and development to boost their productivity and improve their technological competitiveness. The government also needs to promote the nation's economic restructuring to reduce its excessive reliance on exports.