FX feud puts won under upward pressure

By Kim Jae-kyoung, Kang Seung-woo

The Korean won is likely to continue strengthening against the greenback via what’s been labeled a “currency war” between major countries, economists said.

The local currency hit a five-month high on Monday against the U.S. dollar at 1,122.30 won, up from 111.5 won traded on May 4 after rising for seven straight days. The won gained more than 3 percent to the dollar in September alone.

But the won rallied to close at 1,130.7 Tuesday, affected by news that the Bank of Korea (BOK) and Financial Supervisory Service (FSS) will launch a joint inspection on local banks handling foreign exchange businesses.

The dollar has weakened amid efforts of major developed countries to curb the rising value of their own currencies and growing expectations for further quantitative easing steps taken by the United States.

U.S. Congress approved a bill late last month which allows the United States to slap duties on goods from nations with what it claims are undervalued currencies, a move widely seen as laying pressure on China to appreciate the yuan.

“Washington is keen for China to allow the yuan to strengthen as we know. If China allows the yuan to strengthen further, then Korea will probably have to accept some further won appreciation,” Jim O’Neil, Goldman Sachs chief global economist, told The Korea Times.

Another analyst was in line with O’Neil.

“I expect pressure on Beijing to allow the renminbi (RMB) to appreciate to remain intense. I think it was partly in response to the pressure that the Chinese authorities began appreciating the currency in September. I think that was the start of a resumed appreciation trend,” ING Group senior Asia economist Tim Condon said.

“Appreciation pressure on the RMB will spread to all other Asian currencies because of the close economic links among countries. This means the won-dollar rate will continue to go lower.”

Along with the U.S. pressure on China, a recent move by Tokyo to intervene in the foreign exchange market is fueling the currency war.

“I see the Japanese intervention as more designed to stop the yen from strengthening at a time when the yuan is being allowed to rise,” O’Neil added.

In the wake of the turmoil, the government said that the friction may lead to sudden volatilities in the foreign exchange market that require close monitoring to limit the fallout on Korea’s economic recovery efforts.

“The government’s stance is to keep close tabs on foreign exchange-related risks and take preemptive measures to deal with potential problems,” Minister of Strategy and Finance Yoon Jeung-hyun told lawmakers on Monday.

According to the finance ministry, sudden fluctuations of the Korean won against other currencies can put a negative impact on trade and mess up growth that is forecast to expand 5.8 percent year-on-year in 2010, up from the 0.2 percent gain reached last year.

Meanwhile, economists say that the Korean government needs to maintain its current policies to respond to the ongoing disharmony over currency.

“At this stage the best course of action for Korean policy makers is a continuation of the recent policies that have emerged strongly after the 2007-2008 crisis,” Luca Silipo, chief economist of Natixis Asia Pacific, told The Korea Times.

“First, the deep reforms in the domestic and international regulation of the Korean banking sector will allow a further improvement in the business climate in the financial sector. This will end up helping the economy to withstand shocks. On the other hand, supply side policies in the manufacturing and service sectors must not be discontinued and are likely to be much more effective at this stage than currency policies.”

Exporters on hot seat

The continuing won’s strength has alerted local exporters amid concerns over a drop-off in profitability.

Although it has not reached the bottom line yet, an additional sharp decline will affect next year’s business plans as well as export strategies.

As a result, they are trying to come up with plans focusing on increasing profitability, while limiting risks.

“The foreign exchange rate has been close to what we expected at the beginning of the year,” said an official of Hyundai-Kia Automotive Group.

“We have made efforts to maintain competitiveness against the won’s strength for years.”

As for small and medium enterprises (SMEs), they see the 1,100 won level as the break-even point.

Especially, those who import raw materials from China are likely to suffer double trouble in line with the possible yuan appreciation.

But local analysts said that the current situation is not going to get worse.

“In September, the pace of the won’s appreciation was really fast, but the tempo is not likely to continue because global risks will ease in the future,” Kim Jae-eun, an economist of Hyundai Securities said.

According to her, if the won-dollar rate moves below 1,100 won within this year, local export companies will be hit hard.