BUSINESS

Strong won to weigh on exports

By
  • Published : Oct 7, 2010 - 19:01
  • Updated : Oct 7, 2010 - 19:01

Concerns are growing that a steep rise of the Korean won caught in the currency battle would damage its exporters, undercutting its economic recovery momentum.

A continued battle of superpowers for cheaper currencies could increase volatilities in the local financial market and subsequently increase systemic risks in the open economy.

Exchange rate analysts, however, said a stronger won isn’t likely to exert much influence on the benchmark KOSPI as the market is well rooted with solid investor sentiment.

“Korea’s high dependency on trade leaves its exporters more disadvantaged than those in other economies when the currency rises,” Jeong Young-sik, a Samsung Economic Research Institute economist said.

“For every one percent gain of the won against the U.S. dollar, the nation’s export and gross domestic product decreases by 0.05 percent and 0.07 percent each.”

More than 20 nations are involved in disputes over value of their currencies, with the tension between the U.S. and China at the center.

The U.S. Senate Finance Committee last week passed a bill that treats China’s “undervalued” yuan currency as an export subsidy, permitting the U.S. Commerce Department to act on countervailing measures on Chinese exporters.

Against the joint pressure of the U.S. and European countries to lift the yuan, China has been counter-criticizing the group for “escalating the trade issue to a political level.”

Japan cut its benchmark interest to 0.1 percent Tuesday and speculation that the U.S. Federal Reserve would join Japan in increasing its money supply is adding to expectations that the won will strengthen over the next few weeks.

The SERI forecasted the won to appreciate up to three percent against the dollar by the end of this year as a result of international battle for cheaper currencies.

The won broke the 1,120-won level to the dollar mid-Wednesday for the first time since May 4.

It advanced further Thursday and closed at 1,114.5 won after gaining 0.31 percent across the day.

Some economists remained more optimistic than others about the won’s advance for exporters, playing down the effect of a stronger won. They said the yuan and yen are also on the rise, meaning the currency disputes wouldn’t just disadvantage Korean products in the international market.

Importers and domestic-oriented sectors are expected to benefit sharply from the stronger won.

“The yen is rising faster than the won and it is a good news for IT and carmakers here because their main competitors from Japan,” Park Seung-jin, a Samsung Securities analysts said.

Suppliers of food and oil are expected to benefit from the lowered cost of imports. The airline and tourism industry are also to benefit from the case as more travelers would go abroad to take advantage of a stronger won.

“A stronger won sometimes drives the KOSPI down on worries about corporate earnings, but the market right now is well equipped with strong business sentiment and expectations for better corporate earnings,” Park said.

The issue of exchange rate policies is currently being discussed as part of G20 agenda under the category of mutual assessment process. President Lee Myung-bak and SaKong Il, the chief organizer of the G20 Seoul Summit said the issue should be dealt at the G20 Seoul summit on Nov. 11-12.

“The economy is still unstable and we need more policy coordination. We should discuss exchange rate policies along with other agendas at the G20 Seoul Summit,” Lee said Thursday.

By Cynthia J. Kim (cynthiak@heraldcorp.com)


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