The steep appreciation of the Korean won in recent months is unnerving both the government and businesses, which are already struggling with sluggish domestic demand and a slump in the world economy.
The local currency strengthened to 1,020 won to the U.S. dollar last week, the strongest in five years and nine months. What causes more concern is the pace of its appreciation. The won remained at the 1,060 won level in the first quarter, but rose to the 1,050 level early last month, and further to the 1,020 won level.
The Korean currency has advanced the most against the dollar among major currencies in recent months. In April alone, the won strengthened 3.8 percent against the U.S. dollar, the highest appreciation among the world’s 40 major currencies.
The won strengthened mainly because of Korea’s abundant current account surplus and the greenback’s weakness against major currencies. Korea recorded a current account surplus for 25 straight months until March. It would be strange if a country that recorded a $79.9 billion current account surplus in the last year alone did not see its currency appreciate.
The U.S. economy is also playing a role: U.S. Federal Reserve chairwoman Janet Yellen is likely to maintain a loose monetary policy; U.S. firms are performing worse than expected and the world’s largest economy is suffering due to a bigger-than-expected trade deficit.
Judging from these factors, some experts forecast that the Korean currency will likely continue to rise and may even breach the 1,000 level. This should put due pressure on the government and businesses.
Their most pressing job should be to minimize the negative impact on exports, which have been buttressing the Korean economy. Especially vulnerable are small firms since their price competitiveness will be eroded by the won’s surge at a time when they are already facing difficulties due to the global slump.
It is also important to monitor the foreign exchange markets, including short-term capital flows and speculative movements.