Won-Dollar Rate Hits Year’s Low of 1,262

Won-Dollar Rate Hits Year’s Low of 1,262

By Kim Jae-kyoung Korea Times Reporter

With foreign liquidity conditions improving here, the local currency has been rising at a rapid pace against the U.S. dollar, gaining more than 300 won to the greenback over the past few months.

The Korean won closed at a year's high of 1,262.3 won per dollar Thursday, up 308 won from the yearly low of 1,570.3 won March 2, on the back of improving economic fundamentals, such as the rising trade surplus and a bullish stock market. This was its strongest level in four months since it closed at 1,259.5 won at the end of last year.

The rapid gain in the local currency, however, is giving a headache for policymakers as it provides both upside and downside potentials for Asia's fourth largest economy.Appreciation can be a plus for domestic demand by reducing import costs and stabilizing consumer prices. It also reduces interest burdens at local firms saddled with foreign debts.``

Overall, the strengthening won is expected to have a positive impact on the economy as it will reduce firms' short-term debt burden and curb inflationary pressure,'' said an economist at NH Investment Securities.

The problem is that the won is rising too fast, which can hurt local exporters' competitiveness and thus negatively affect the current account balance that many believe will weaken the upturn momentum in the economy.

``The first-quarter GDP outcome was due to the won's depreciation that led to expansion of automobile and commodity sales in China,'' Independent Economist Andy Xie said in a recent interview.``But the downturn is far from over. The won has bounced back significantly,'' he added, indicating that the economic recovery will not be sustainable if the won keeps gaining strength.

The won's rapid gain came as foreign liquidity conditions have improved significantly thanks to a record current account surplus, the government's recent $3 billion issuance of dollar-denominated bonds and massive liquidity supply by the central bank.The local banks' liquidity in foreign currencies recovered to the pre-crisis level recorded before Lehman Brothers filed for bankruptcy last September.

The foreign currency liquidity ratio of 18 local lenders, which gauges their ability to pay off three-month overseas debt obligations, rose by 7.1 percentage points to 106 percent in February from December.The nation's foreign exchange reserves rose to a seven-month high in April at $212 billion, up from $206.34 billion a month earlier, and the highest since September last year, when it posted $239.67 billion.

Market analysts said that the won-dollar rate will likely continue on an downward trend due to the large current account surplus, rising foreign reserves and a foreign investors buying spree on the local stock market.They expect financial authorities will step in to keep the exchange rate between 1,200 and 1,250 won to help local exporters maintain their competitiveness in the global market.``

We expect the authorities will intervene to support the rate if it breaks the key level of 1,250.

Most people seem to agree that the recent over-performance of Korea's exports can partially be ascribed to the weak won,'' Citigroup economist Oh Suk-tae said.``So policymakers are likely to prevent the excessive or premature strength of the won to maintain the favorable momentum in exports into the second half of this year,'' he added.On Thursday, ING Group economist Tim Condon revised his one-month exchange rate target to 1,225, saying, ``Current and capital flows are local currency-positive and April's big reserve increase shows that the central bank is leaning against the wind of market pressure to replenish some of the $58 billion reserves it lost in the second half of 2008.''Standard Chartered Bank also forecast the won-dollar rate to fall toward 1,170 over the next three months.