By Lee Hyo-sik
Staff Reporter
The won closed sharply higher against the dollar Tuesday, rising for the fourth day on the ample supply of dollars on the local foreign exchange market as a result of strong exports and foreign buying of local stocks.
Currency dealers said the won has gained ground against the greenback recently as the U.S. Federal Reserve's decision to maintain its key interest rate at the current 5.25 percent last week and a series of recent terrorist plots in London kept the dollar globally weak.
The won closed at 918 won to the dollar Tuesday, up 3.7 won from a day earlier, the strongest level for the won since Dec. 7, 2006 when it traded at 913.8 won. The benchmark Korea Composite Stock Price Index (KOSPI) jumped 34.15 points, or 1.93 percent, to 1,805.5.
Also, the won closed 749.2 won to 100 yen, compared with the previous close of 752.14 won. The won has strengthened against the yen over the past year as the Japanese central bank has been reluctant to raise its key interest rate to help boost its economy.
Dealers said that the won also received a boost from Moody's Investors Service announcement earlier in the day that it was reviewing South Korea's sovereign for a possible upgrade, citing improvement in the economy and progress in North Korea's denuclearization.
A stronger won makes Korean goods expensive on overseas markets and erodes corporate earnings. The worsening business bottom line will also lead to a drop in corporate employment and investment, negatively affecting domestic consumption.
``Domestic exporters have been converting record amounts of dollars they earned abroad into the won on the local foreign exchange market, pushing up the value of local currency. Also, foreign investors have brought dollars into the country to purchase local stocks amid the bullish market run,'' said a currency dealer at the Korea Exchange Bank (KEB).
The country's current account recorded a surplus of $924 million in May, the first surplus in three months, as customs-cleared exports soared 11.4 percent year-on-year to $31.1 billion.
He said the U.S. and other developed countries have put pressure on China and other Asian economies to revalue their currencies in a bid to improve the trade imbalance, contributing to strengthening the won. ``Also, the Federal Reserve's recent decision to keep its interest rate and terrorist threats around the global has weakened the dollar,'' he added.
Shin Min-yong, a senior economist at the LG Economic Research Institute, said currency dealers and companies sold dollars on the expectation that the won will continue to strengthen against the dollar and other foreign currencies. ``The current account surplus last month and domestic shipbuilders' record amounts of orders have prompted exporters to dump dollars to hedge against the currency loss.''
He expected the won to continue to gain ground against the dollar for the foreseeable future unless there is a significant shift in the market sentiment, adding that most currency market participants are betting on the weak dollar.
``In particular, it will be difficult for the government to actively meddle in the market to help stop the won's value as it has incurred a large amount of losses over the years because of interest payments on foreign exchange stabilization bonds and foreign exchange losses,'' Shin noted.
The government expressed concerns over the local currency's steep appreciation and said it is closely monitoring the won's direction.
``We are worried about the currency movement, which seems to be out of line with the country's macroeconomic conditions. We are closely monitoring the foreign exchange market," the Ministry of Finance and Economy said in a statement.