By Yoon Ja-young
As the local currency is facing pressure to strengthen, exporters are concerned over potential losses. The central bank is also expected to be left with few options as a strong won will lead to low inflation.
The Korean won closed at 1,069.6 won per dollar, Friday, which is up 9.9 won from the previous day. Analysts, however, expect the rebound of the won/dollar rate will be limited, citing lessening geopolitical risks as well as the U.S. pressure over the country's foreign currency policy. It contrasts with last September when the rate stood at around 1,140 won per U.S. dollar.
“Following the determination to disclose intervention in the foreign exchange market, the government will refrain from any intervention. With the summits scheduled between the South and the North as well as between North Korea and the United States, the Korean won will face stronger pressure to rise in value,” said Lee Young-hwa, an economist at Kyobo Securities.
Korea has been engaged in talks with the United States over measures to enhance transparency of its foreign currency market. It is expected to disclose a “smoothing operation” in the market, in which it sells or purchases dollars to stabilize the market in cases of fluctuations. It is also awaiting the United States' semiannual report on “currency manipulators.” Analysts agree that the government will refrain from any intervention even when it is necessary.
However, the falling won/dollar rate is threatening exporters.
Park Sang-hyun, an economist at Hi Investment and Securities, said that businesses will lose price competitiveness.
“The Korean won has already strengthened notably against other currencies. If further appreciation of the won comes, the exporters will see their competitiveness seriously damaged,” he said.
According to Hyundai Research Institute, a 1 percent fall in the won/yen rate decreases exports by 0.32 percent as Korean firms are put at a disadvantage against their Japanese rivals. Small and medium sized enterprises (SMEs) are especially vulnerable as they are not hedged against foreign exchange losses.
The central bank is also having problems in monetary policy. The country's key rate became lower than the rate of the United States, following a 0.25 percentage point hike in the United States last month. The interest rate reversal led to concerns that a capital exodus may follow, but the central bank is cautious about a rate hike due to low inflation. Consumer prices rose 1.3 percent in March from a year ago, dropping from the 1.4 percent rise of the previous month. Inflation has been below the 2 percent target, and the strong Korean currency is likely to pull it down further as import prices fall.
'The strong Korean won and the slowdown in the domestic economy are restricting consumer prices. As the won/dollar rate continues to fall, import prices are being pulled down,” said Kim Doo-un, an economist at Hana Financial Investment.
“Though the market consensus is that the Bank of Korea will raise the key rate within the second quarter, it may have little room to do so if consumer prices continue to fall short of its inflation target of 2 percent.”