Won Likely to Lose Against Dollar in Jan.
By Lee Hyo-sik
Staff Reporter
The won is projected to lose ground against the dollar this month as more banks and businesses, which have so far refrained from buying the greenback at the government's request, are expected to purchase dollars from the local foreign exchange market to settle international transactions.
Additionally, the government, which had sold dollars to shore up the won's value toward the end of last year, is unlikely to intervene in the currency market, further weakening the local currency.
On Dec. 29 and 30, the government dumped billions of dollars on the domestic market to bring down the won-dollar rate to help banks and companies improve their balance sheets by lowering the value of foreign loans they borrowed from abroad against the won. They closed their 2008 books Dec. 30 and their assets and liabilities are calculated based on the exchange rate of the year's last trading session.
The stronger the won is, the lower foreign liabilities are in the won. On Dec. 30, the last trading day of 2008, the won closed at 1,259.5 won against the greenback, up 3.5 won from the previous trading session, mainly due to the government's heavy market intervention, despite individuals' massive dollar buying. On Dec. 29, the won-dollar rate closed at 1,263 won, down 36 won from the previous day.
Due to the strengthened local currency, banks were able to raise their capital adequacy ratios under the Bank for International Settlement (BIS) because the value of foreign-currency denominated loans they borrowed overseas declines in won.
However, the Korean currency is coming under pressure as domestic banks and companies that have delayed dollar buying are poised to become active buyers on the local currency market.
Also, the government is widely expected to remain on the sidelines and tolerate the won's weakness against the dollar in the coming months to prevent further depletion of the nation's foreign exchange reserves and help boost exports to improve the current account balance.
Reflecting such a trend, the won closed at 1,343 won against the greenback Dec. 31, down from the previous day's close of 1,259.5 won, on the non-deliverable forward (NDF) market where foreigners trade the local currency.
However, analysts say that the won will gain ground against the dollar in the longer term amid a stabilizing international financial market, foreign buying of local shares and bonds, and the improving current account balance.
They say the dollar's weakness is inevitable, given the U.S. record-high fiscal and current account deficits, its near zero interest rate policy and the massive dollar supply worldwide in the wake of the current financial crisis.