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Strong won pressures BOK on rate policy

The possibility that the Korean currency will rise in value up to nearly 1,000 won against the U.S. dollar is growing with recent stronger position of the won.

The dollar has slid to around 1,050 won, the cheapest level in nearly three years due mainly to the combination of a strong trade balance and policy factors.

Research analysts say the won’s gain is logical. They cite three reasons in particular: a continuing current account surplus, a slowdown in the economic recovery of the U.S., and the global pressure on China to raise the value on the yuan.

Few research institutes predict that the won will return to its cheaper position in the coming months, posing a dilemma for the nation’s monetary policy.

The Bank of Korea’s Monetary Policy Committee has had trouble in setting the benchmark interest rate amid the contradictory indices with rising consumer prices and the strong currency.

Goldman Sachs Group has predicted that the Korean currency is expected to appreciate to 1,010 won against the U.S. dollar in 12 months.

The won has gained 6.4 percent against the dollar this year, becoming one of the best-performing currencies in Asia.

“We see room for further appreciation on a positive balance of payment outlook, strong inflation pressure in the near term, and the policy backdrop in Korea as reflected in recent official macro forecasts,” Kwon Goo-hoon, an economist at Goldman Sachs, said in a report.

The U.S. investment banking giant upgraded its three-month, six-month and 12-month outlooks for the Korean won to 1,040 won, 1,030 won and 1,010 won from its previous forecasts of 1,060 won, 1,050 won and 1,040 won.

The revision comes amid projections the country’s trade balance will remain strong over the next few months.

Korea’s exports are expected to stay robust in the second half of the year on prospects of Japan’s recovery, a moderate acceleration in U.S. economic growth as well as a competitive Korean won, according to Goldman Sachs.

The BOK recently raised its current account forecast for 2011 to $15.5 billion from $11 billion. A positive current account translates to a stronger local currency, as more exporters try to exchange the greenback for the Korean won.

By Kim Yon-se (kys@heraldcorp.com)
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