Won on Course Toward Yearly High

Government May Step In to Slow Rise

By Kim Jae-kyoung

Staff Reporter

The Korean won has emerged as the biggest winner against the U.S. dollar among major currencies, with the local currency gaining the most value against the greenback since the beginning of this year.

The local currency closed at 1,123.20 won Tuesday, up nearly 3.69 percent from the end of last year, approaching the yearly low of 1,119.8 won on January 11. The exchange rate remained intact after a 'smoothing operation' by financial authorities.

The won's performance is standing out as many other currencies have strengthened at a much slower pace against the dollar. Some currencies, such as the euro and Japanese yen, have even lost some ground over the same period.

The euro was down 5.89 percent against the dollar, while the British pound and Japanese yen have also lost 5.41 percent and 2.24 percent, respectively.

The strong won is a double-edged sword for the economy. It will be a plus because it will reduce import prices, thereby curbing inflation. But if it continues to gain ground, it can chip away at local exporters' price competitiveness.

The won's robust performance was due to the faster-than-expected recovery and a foreign buying spree on the local equity market.

According to the securities industry, foreign investors' investments here increased to 6.14 trillion won during the first three months of 2010, marking the largest since the first quarter of 2004 when it stood at 9.2 trillion won.

What is of concern is that the won's strength is likely to continue on the back of the recent strong economic growth and weak dollar.

``Korea's economy continues to recover, albeit at a steady pace. February exports declined from the previous month, but the trade balance moved into positive territory,'' Standard Chartered First Bank senior economist Oh Suk-tae said.

``Korea's strong fundamentals have not changed. As risk appetite stabilizes and uncertainty surrounding sovereign debt subsides, the dollar weakness is likely to take hold on Asian currencies, excluding the yen. The won is expected to lead the rally in Asian currencies into the second half of 2010,'' he added.

Flashbacks

Coupled with the won's rapid appreciation, the recent comeback of former vice finance minister Choi Joong-kyung as an economic secretary to President Lee Myung-bak has created a sense of d?j? vu of the currency market in early 2008.

At that time, Choi was at the nation's economic control tower in charge of foreign exchange policy. He then intentionally pulled down the won's value to boost the nation's outbound shipments for higher growth. Choi's return to Cheong Wa Dae is widely expected to increase intervention in the currency market to curb the won's rise.

The fact that the Kim Choong-soo took the helm of the central bank is also raising the possibility that financial authorities will work together to keep the won from rising at a rapid pace. ``Dedicated efforts should be devoted to cooperating closely with the government and the supervisory authorities for the sake of financial stability,'' Kim said in his inauguration speech at the Bank of Korea.

Market participants speculate that Korean authorities will soon step in to curb the appreciation of the currency.

``Both Choi and Kim are considered more growth-oriented than their predecessors. In that sense, I don't think that they will sit back and let the won keep rising against the dollar,'' a local bank executive said, asking not to be named.

``While the job market and private consumption stay in the doldrums, exports are now a one-legged engine for complete economic recovery. I think that once the exchange rate falls below a certain level, the government will step in,'' he added.