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Stronger won an option to tame inflation

Currency appreciation would improve supply of imports, reduce currency volatility, economists say

A stronger won could help tame the country’s inflationary pressure, as a tool to ease the burden of surging import prices, economists said Thursday.

Although tolerating a more expensive won would hurt exporters, the move will ease some supply shortage, they said.

They predicted that further appreciation of the Korean currency at this stage could also minimize exchange rate volatilities as it would be tracking movements by regional peers also fighting inflation.

“A large part of the inflationary pressure we have now is caused by the rising commodities and subsidiary material costs as the country is heavily trade-dependent. A stronger won could ease some of the burden and boost purchasing power,” Lim Hee-jung, an economist at the Hyundai Economic Research Institute, told The Korea Herald.

China raised its benchmark interest rate Tuesday for a third time in four months and Indonesia made a similar move last Friday. Both currencies rose relative to their trading peers since then.

Higher benchmark rates support a nation’s currency as higher yields encourage an inflow of foreign funds.

Lim said exports have been resilient in the face of reduced demand from Europe and the U.S. last year. Korea’s December exports shot up 23.1 percent from a year before, to $44.34 billion. Korea is the world’s seventh largest exporter.

The Bank of Korea can use a combination of a stronger won and higher interest rates to fight inflation.

The won dipped to a one-week low Thursday after foreign investors dumped local shares in anticipation of a raise at the interest rate-setting meeting slated for Friday. The won closed at 1,117 against the U.S. dollar, down from Wednesday’s 1,108.9. The KOSPI fell 1.8 percent to 2008.5.

The rate currently stands at 2.75 percent. Consumer prices climbed 4.1 percent from a year earlier in January, breaking the 3 percent target range set by BOK. Finance Minister Yoon Jeung-hyun on Wednesday nudged oil importers and communications service providers to cut prices, criticizing their hefty profits.

Mindful of the inflationary concern, economists urged the central bank to fight price surges more vigorously.

“I am aware that the Finance Ministry said that rate hike, as a demand side control, would not completely contain supply side inflation. But the economy has plenty of rising consumer demands which could be tamed with a rate hike,” said Bae Min-keun, an economist at the LG Economic Research Institute.

According to foreign exchange traders in Seoul, intervention by the central bank was seen, selling the won for dollars.

“The movement isn’t very active this week but we have seen some intervention. We expect the 1,100 level against the greenback to be kept for this year,” Cho Yeon-seok, a FX dealer at the Korea Exchange Bank, said.

He expected the won to trade in a narrow range this year, with its strongest peak to be 1,050 and the lowest at 1,160 against the U.S. dollar.

The central bank was last suspected of intervening in the market on Jan. 13 and traders expected the officials to continue to tap into the market.

The U.S. Treasury Department last week said the won was 5 to 20 percent undervalued, criticizing Seoul officials for keeping its hands on the foreign exchange market.

“The final tool in the armory of the region’s authorities is FX appreciation. Korea, Indonesia and Taiwan have shown greater desire for currency appreciation to help tackle inflation,” Fiona Lake, an analyst at Goldman Sachs, said in her report.

A total of nine out of 12 analysts surveyed by Bloomberg News said they expect the benchmark policy rate to rise by a quarter percentage point to three percent at the BOK meeting Friday.

By Cynthia J. Kim (