South Korea’s economy looks robust given its record account surplus and foreign-exchange reserves. Yet, the Finance Ministry and the central bank are under growing pressure as the local currency continues to strengthen, raising worries among exporters about weakening price competitiveness.
Market data showed on Monday the Korean won hit its highest level against the Chinese yuan in nearly three years.
The Korean currency hovered around 163 won to the yuan on Monday, appreciating by nearly 10 percent since the beginning of February.
South Korea’s 10,000 won banknote sits on a pile of Chinese 100 yuan banknotes for a photograph at the Korea Exchange Bank headquarters in Seoul. (Bloomberg)
Market watchers say the currency issue is particularly sensitive given the sharp fall in the yuan as well as the Japanese yen since late 2012, which could make Korean products less competitive in many markets where Beijing, Tokyo and Seoul go head-to-head.
“The strengthening won coupled with the falling yuan is hurting price competitiveness of Korean exports,” a local currency strategist said.
Exporters have also been concerned that the stronger won may hurt shipments to China. Korean exports to China, in fact, fell by more than 9 percent to $11.3 billion in May from a year earlier, according to trade ministry data.
The won has seen its value measured in U.S. dollars jump over the past few months.
Some analysts predict that the exchange rate may sink to below 1,000 won per dollar in the latter half, damaging exporters and denting economic growth.
The won-dollar exchange closed at 1,016.20 won against the greenback on Monday, 4.30 won below Thursday’s rate, to reach to its lowest level since the 2008 global financial crisis.
The Bank of Korea noted earlier that it would take measures if volatility in the currency market increases. Some are now calling for the central bank to take immediate action to weaken the won to make exports more competitive.
Currency intervention, however, is always a sensitive issue. Although countries can devalue their currency by buying foreign currency, other countries object as it pushes up their exchange rates.
Some analysts insists that more dollar purchasing to resist the won’s appreciation would do more harm than good, given the country’s already abnormally large account surplus.
Kim Young-ick, adjunct professor of Sogang University’s Graduate School of Economics, pointed out that the won is still undervalued, compared to the level of 2007.
“The recent won’s appreciation is a result of an unbalanced economic growth, the country’s export-led growth. The Korean economy now needs structural changes to find a balance between exports and the domestic market,” Kim added.
By Oh Kyu-wook (firstname.lastname@example.org)