The Korean won has gained the most to the U.S. dollar among 30 currencies of developed and developing economies in a month, putting financial authorities on alert against further appreciation of the won, industry sources said.
The won strengthened nearly 5 percent as of Wednesday with the exchange rate falling below 1,100 won on increased volatility stemming from a weak yen driven by Japan’s aggressive monetary easing. Few restrictions governing foreign exchange transactions in the country are further boosting the value of the won.
Monetary easing from advanced countries with low borrowing rates such as Japan is spurring the flow of capital to higher-yielding assets such as in Korea. Here the interest gap with other markets is relatively high, making it attractive for speculative investments.
These factors may fuel more capital into the country where investors can speculate by short-selling their position on the won and reap profit that could further strengthen the won and increase exchange volatility.
This could make Korean products less competitive in terms of price overseas as a strong won would force manufacturers to raise prices to maintain margin.
Japan’s weak yen spurred the won’s strength, breaching the 1,100 won mark per 100 yen as of Wednesday, according to a Bank of Korea data. A weak yen and a strong won could adversely affect the Korean economy, analysts warned.
Although the BOK did not ease its monetary policy on Thursday due to the weakening yen, BOK Governor Kim Choong-soo said Japan’s rapid currency depreciation was a concern for the Korean economy.
The central bank slashed its key interest rate to 2.50 percent amid growing government pressure for a lower rate to overcome Korea’s eight straight quarters of GDP growth below 1 percent.
A lower benchmark interest rate would theoretically make a country’s currency weaker as low borrowing costs boost money supply. However, Kim said the foreign exchange market was something that should be monitored, and no central bank in the world based its monetary policy on currency trends.
Currencies of Malaysia, Taiwan, Canada, the U.K. and the Philippines strengthened over the last month, though not as much as the Korean won.
By Park Hyong-ki (email@example.com