Is won on course toward 3-digit level?

By Kim Jae-kyoung

The Korean won is expected to extend its gains against the dollar this year. A strong won is a double-edged sword but if the psychologically-important 1,000 won level breaks, it is highly likely to dampen the competitiveness of Korean exporters creating a burden for Asia’s fourth-largest economy.

The won, which was the best performing emerging market currency in 2017 climbing around 13 percent against the greenback, ended at 1,061.2 won, Jan. 2, the highest since October 2014. It is now hovering around 1,065 won per dollar.

Against this backdrop, South Korean jawboning followed. Finance Minister Kim Dong-yeon and Bank of Korea (BOK) Governor Lee Ju-yeol recently expressed concerns about the won’s ascent vowing to take stern measures on the one-sided move of the won.

Analysts say it is unlikely that the won-dollar rate will drop below 1,000. The rate has remained at the four-digit level for nearly ten years since April 28, 2008.

The won’s rise is being driven by several forces _ a weakening dollar, robust exports, easing tension on the Korean peninsula following talks between the two Koreas, and the Bank of Korea’s (BOK) shift to a tightening of monetary policy.

Rob Carneel, head of Asia-Pacific Research at ING Bank, said, “The Korean won will continue to gain ground against the U.S dollar partly as a function of dollar weakness against other majors which have a stronger appreciation story, but partly also because of the strength of the Korean economy and the BOK’s likely tightening response.”

He expects that the won-dollar rate will approach 1,000 by the end of 2018.

Vince Conti, an economist at S&P Global Ratings, expects that the U.S. Fed’s continuing moves to unwind its stimulus will curb the won’s continuing appreciation against the U.S. currency.

“News about the meeting between North and South Korea to discuss the former’s participation in the Winter Olympics further gave the won a boost,” Conti said.

“Despite the recent weakening, the strong electronics story will probably keep the won relatively strong, but with a limit to its appreciation especially later on in the year as the Fed continues to normalize rates.”

Some analysts say that it is important to pay attention to the movement of the Korean won against other major currencies, such as the euro, to see how the fluctuations will translate into the economy.

“If you compare today’s value with a year ago the won has the same exchange rate relative to the euro and other currencies,” said Antonio Fatas, a professor of economics at INSEAD’s Singapore Campus. “What is different is the depreciation of the U.S. dollar against most other currencies.”

He expects that the won’s movement against the greenback to possibly affect exporters, but its effect won’t be that large for several reasons.

“Exchange rates have been shown to affect exports much less than in the past because the pricing by companies is not that reactive to them but also because of the complexities of production supply chains,” he said.

“What Korea exports incorporates value from many other markets and some of his exports go to markets where the depreciation has not happened,” he added. “So at this point I do not see these movements in exchange rates as very significant so I would not see them as a fundamental risk in 2018.”

Korean authorities’ dilemma

The won’s continuing ascent has put Korea’s financial authorities in tricky situation.

The rapid rise is making policymakers feel uneasy as a fast-rising currency poses a threat to its exports, but it provides some room for Korea in negotiating a new trade deal with the U.S.

In other words, the won’s rise could make U.S. policymakers happy by reducing their country’s trade deficit with Korea, which is already on a U.S. watch list for currency manipulation.

For this reason, analysts expect that the future course of the local currency is likely to be a function of Korea’s trade balance with the U.S. and Fed’s monetary policy.

“If Korea has a surplus and the U.S. a deficit, then you would expect the won to appreciate,” said Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School.

“If Korea raises interest rates faster than the Fed, then you would also expect the won to appreciate,” he added.