Will Free Trade With US Boost Won?

By Na Jeong-ju

Staff Reporter

The won is gaining strength sharply against the dollar as foreign investors have been heavily buying Korean stocks after the country signed a free trade agreement (FTA) with the United States.

The won’s rise is expected to cut into earnings of Korean exporters, overshadowing the positive effects the Korea-U.S. FTA will have on the Korean industry, analysts say.

Concerns about speculative currency trading are also getting stronger amid expectations that the Korean currency will gain further strength. Analysts say the FTA will invite more investors to the Korean market, causing weaker investor sentiment in the dollar.

``The free trade deal is expected to boost exports to the U.S., but if the won rises, it will be meaningless for Korean firms,’’ said Kim Chong-de, an official of the Bank of Korea.

The won was trading at 940.9 won per dollar just before South Korea and the U.S. singed an FTA on April 2. However, on the day the news of the FTA signing broke out, it closed at below 940 won per dollar. The won has continued to rise for the past couple of weeks. After a brief downward correction on Monday, the won gained again on Tuesday, closing at 929.00 won against the dollar, gaining 2.8 won from a day earlier.

Analysts say foreigners’ massive buying of Korean stocks is the main driver of the won’s appreciation. This month, foreigners bought stocks worth 1.7 trillion won, pushing the KOSPI to a record high.

The won's gain over the dollar will hurt Korean exporters significantly as it makes their goods more expensive overseas and erodes corporate earnings. It will also cause a drop in corporate employment and investment, and will negatively affect domestic consumption.

Analysts forecast that the won will gain further against the dollar this year on globally weak dollar sentiment. Australia and Singapore saw the value of their own currencies rise after they signed an FTA with the U.S.

The Australian dollar has risen about 5 percent against the U.S. dollar since the country signed an FTA with the U.S. in 2004. The value of the Singaporean dollar also gained about 12 percent since the signing of the FTA with the U.S. in 2003.

``Many domestic companies have also been converting foreign currencies they earned overseas into won in the local currency market on the expectation that the Korean currency will continue to gain ground against the dollar,’’ said Lee Yoon-seok, a research fellow of the Korea Institute of Finance.

``The government may move to intervene in the currency market to help stop further gains in the won and to protect Korean companies. However, there have been no such signs yet.’’

However, some analysts said that the won’s gain from the KORUS FTA will be limited as free trade will reduce Korea’s current account surplus in the long-term.

``I don’t think the FTA with the U.S. will give any big boost to the value of the won,’’ said JPMorgan Chase economist Lim Jiwon.

She said that U.S. exporters will benefit more than Korean exporters to the U.S. as tariff cuts will be larger for U.S. goods.

``If we look at bilateral trade between the U.S. and Korea, U.S. exports will benefit more than Korean exports. If other factors are not taken into account, the trade account between the two countries will not be so favorable to Korea,’’ she said.

She said that the won is unlikely to maintain its strength against the dollar in the months to come.

The local currency has appreciated more than 40 percent against the dollar over the past five years on current account surpluses and generally weak dollar sentiment, according to the BOK. The won rose to 929.8 won against the dollar at the end of last year, up 41.3 percent from 2001 when the won-dollar rate was 1,313.5 won. Last year alone, the local currency gained 8.8 percent against the greenback, recording the highest rate among Asian currencies after Thailand's baht.

jj@koreatimes.co.kr