The South Korean currency will continue to rise against the U.S. dollar, possibly breaching the psychologically sensitive 1,000 won level within this year, backed by a steady current account surplus and improving economic outlook for Asia’s fourth-largest economy, analysts said Thursday.
But the pace of its appreciation will be curbed in part by limited intervention by the currency authorities, they said.
The local currency gained some 12 percent against the greenback in the past year, and the gain has further accelerated in the recent months. This year, the won advanced some 4 percent to the dollar, quoted at 1,015.70 on Wednesday, the strongest level since Aug. 1, 2008, when the comparable figure was 1,014.6.
The won retreated from a nearly six-year high on Thursday, closing at 1,017.70, down 2 won from the previous session’s close.
“The recent appreciation (of the won) is backed by a continued inflow of foreign capital into the local stock market and a large current account surplus,” said Lee Seung-ho, a researcher at the Korea Capital Market Institute.
The country’s current account has been logging a surplus for more than two years as exports remain firm, lending support to the local currency against the U.S. dollar.
Asia’s fourth-largest economy saw its surplus widen to a record $79.88 billion in 2013. The Bank of Korea projected this year’s figure to reach $68 billion. Local exporters have accelerated their dollar selling on expectations that the local currency will further gather ground to the dollar.
Adding to upward pressure on the best performer among 17 major currencies, foreign investors massively scooped up local shares with their net buying in the past two months reaching some 6 trillion won ($5.89 billion).
Analysts say foreigners’ buying binge would continue on improving economic prospects and a recovery in the Chinese economy, South Korea’s top trading partner.
“Investors are increasingly fond of risky assets, and foreign investors are highly likely to pump more money into the South Korean stock market,” said Kim Hak-kyun, an analyst at KDB-Daewoo Securities.
Given this trend, some investment banks are revising their estimates for the won-dollar rate. Credit Suisse put the rate at 975 won per dollar by the end of the year. Wells Fargo expects the won-dollar rate at 990 won.
But many think the Korean won will not easily exceed the symbolically important 1,000 won level as local authorities are firmly curbing the won’s sharp ascent, which could wreak havoc on exporters.
Also, the U.S. economy is maintaining its recovery pace, strengthening the dollar, which in turn may limit the won’s rise, they said.
“The currency authorities will fine-tune the exchange rate in order to curb the won’s sharp rise,” said Ma Ju-ok, an analyst at Kiwoom Securities.
The strengthening won could become a headache for South Korean policymakers as it could hurt exporters’ profitability by cutting their price competitiveness in overseas markets.
Many policymakers, however, seem to be accepting the won’s current move, just hoping to ease or curb the pace of increase.
Last month, BOK Gov. Lee Ju-yeol said the firming won has positive impacts on local domestic demand, although it could have the opposite effect on exports.
A central bank is normally forced to cut rates when a currency rises sharply. But the Bank of Korea is cautious about doing so as the economy is on a recovery track and inflation is gathering pace.
South Korea’s consumer prices grew 1.7 percent on-year in May, the fastest on-year rise since October 2012, when they advanced 2.1 percent, according to the report by Statistics Korea.
Earlier in the day, the central bank froze the key interest rate at 2.5 percent for the 13th consecutive month for June as the local economy is slowly recovering. (Yonhap)