The alarm bell had already been ringing since early this year, but the won’s rise to a fresh six-year high last week should further alert all the players in the economy.
The Korean currency closed at 1,009.20 won per dollar on Wednesday, hitting its strongest level since July 31, 2008. The won, which had gained about 12 percent against the greenback last year, has advanced some 5 percent so far this year. The Korean currency is also gaining strength against other major currencies like the yen and yuan.
There are plenty of reasons for the won to rise steeply. Korea has record-high foreign exchange reserves on the strength of continued current account surplus, and foreign capital continues to flow into the local stock market. Externally, currency devaluation in the United States, Japan and Europe by quantitative easing fuels the won’s rise.
Being hardest hit by the strong won is exporters, especially small- and medium-sized enterprises that can least afford to absorb the impact than conglomerates. It is no coincidence that exports, which account for 57 percent of the gross domestic product, expanded only 2.6 percent in the first half. In terms of won, exports declined 2.6 percent on-year.
The most urgent action to take is to minimize the negative impact on exports. This is all the more necessary because domestic demand is still sluggish. Government and business are urged to do whatever they can respectively to cope with the strong won.
The primary upside of a strong won is that it helps boost imports and domestic demand, which should not be taken lightly. In this sense, it is not an easy task, but authorities should strive to curb rapid fluctuations of the won and gauge the overall impact on both exports and domestic demand to keep the exchange rate at an optimal level. They also need to pay heed to some experts’ suggestions to lower the benchmark interest rate.