Korea’s foreign exchange market is expected to undergo a tough first quarter in 2012 as the Korean won is likely to weaken amid lingering eurozone woes and a current account deficit, market watchers said Friday.
Global uncertainties stemming from Europe’s debt crisis and a U.S. economic slowdown weighed on the local currency this year.
After strengthening to a yearly high of 1,050 won to the U.S. dollar on July 27, the won depreciated 12.2 percent to a yearly low of 1,196 won on Sept. 26.
Experts said lingering eurozone risks and a spate of regional government bonds expected to mature in the February-April period may increase appetite for safer assets and make the won weaken in the January-March period.
“The financial linkages between the eurozone and Asia are extensive and this channel presents significant capital flight risk, as experienced during the U.S. financial crisis,” Japanese investment giant Nomura said in a recent report, adding that Korea, India and Indonesia are relatively vulnerable to increased deleveraging of the eurozone.
The country’s current account, which is likely to swing to the red in the first quarter amid seasonal factors and weak economic growth, is another factor that is expected to eat into the won’s strength, according to market watchers. A current account surplus tends to strengthen the local currency’s strength.
Global investment giant Goldman Sachs painted a grim picture of South Korea’s current account balance, projecting a 0.2 percent deficit in the first quarter.
However, market watchers projected the won will eventually strengthen next year as foreign investment and the current account surplus improve.
“Increased foreign inflow and a current account surplus is expected to boost the won in the second half amid a recovering global economy and improving situations in the eurozone,” Samsung Economic Research Institute said in a report, adding the won is expected to trade against the greenback at an average 1,080 won in the first half and 1,040 won in the latter half.
Other watchers projected a similar outlook. LG Economic Research Institute forecast the won to strengthen to 1,085 won in the second half from 1,115 won in the first half.
Goldman Sachs said the won is likely to weaken to around 1,180 won in the first quarter but reach 1,040 won at year-end, while Nomura said the local unit is expected to settle at 1,100 won at the end of 2012 after easing to 1,170 won in the January-March period.