Seoul faces escalating US pressure to appreciate won

By Choi Sung-jin

The recent U.S. designation of Korea as one of the five countries to watch in terms of foreign exchange policy is increasing pressure to appreciate the won, a report said Tuesday.

“The increasingly tough U.S. foreign exchange policy is expected to work as a considerable pressure to raise the Korean currency’s value in the future,” said the LG Economic Research Institute report.

In a report on foreign exchange policy submitted to the U.S. Congress last month, the Department of the Treasury put Korea, Germany, Japan, China and Taiwan on its “monitoring list.”

The department designates a country as a currency manipulator if it meets three conditions - records a surplus of $20 billion or more a year in trade with the United States, has a current account surplus that surpasses 3 percent of its GDP and makes persistent, one-sided intervention in currency markets. If a country meets two of the three conditions, it is placed on the monitoring list, and Korea belongs to the first two cases.

“It was a prelude to foreign exchange conflict across the Pacific,” wrote Bae Min-keun, a fellow at the institute.

The simultaneous strength of the Korean, Japanese and Chinese currencies is the reflection of such changes in advance, Bae said. The won, yen and yuan have been appreciated by 8.8, 12.7 and 1.8 percent, respectively, from their lowest points this year.

The rise in a country’s currency value means its economy is in good condition but currency appreciation unaccompanied by the improvement of fundamentals, such as production capacity and competitiveness, can cause adverse aftereffects. When the global trade setback shows little sign of improving, the rise of the won can prolong the nation’s export slump while narrowing the maneuvering range for financial officials here, who will find it more difficult to fine-tune foreign exchange policy, he said.

“In addressing Korea’s external imbalances, the most fundamental remedy is to increase domestic consumption and investment,” Bae said. “At the same time, Seoul should seek ways to enhance the transparency of its foreign exchange while raising issues with the criteria of the U.S. policy and persuading their U.S. counterparts.”

Contrary to the prevalent forecasts on the Korean currency’s strength since the U.S. move, the won remains weak against the dollar these days.

The Korean currency closed at 1,172.6 won to the dollar Tuesday, down 6.8 won from Monday and losing 34.8 won over four consecutive trading days. It was the first time in 50 days the Korean unit had fallen to the 1,170 won range.

Market analysts attribute the unexpected movement of the exchange rate to two factors – the weakness of major economies, including the U.S. and China, and the increasing likelihood of a U.S. interest rate rise.

That may be a temporary phenomenon, however, experts said. “The poor job reports and other factors show the U.S. dollar’s strength will not last long,” said Park Sung-woo of the NH Futures Research Institute. “The Korean currency can hardly fall back below 1,200 won against the greenback.”