Won smashes 1,200 line as stronger days forecast

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Won smashes 1,200 line as stronger days forecast

The Korean won strengthened to a one-year high against the U.S. dollar yesterday, as the greenback closed below 1,200 won for the first time since Oct. 1, 2008. And analysts predict that the won will likely continue to rise in value with minimal impact on stocks.

The dollar ended the day at 1,194.4 won on the Seoul foreign exchange, down from 1,203.8 won on Tuesday.

“The dollar is weakening worldwide, because investors’ preference for safe assets is declining on increasing expectations of global economic recovery and because dollar-carry trades have appeared,” said Jeong Young-sik, a senior economist at Samsung Economic Research Institute.

In dollar-carry trades, investors borrow the greenback at low interest from the United States and exchange it for the currency of another country, such as the Korean won, which can offer higher returns.

“In addition, the Korean economy’s relatively rapid recovery and the active buying by foreign investors on the Seoul stock market is buoying the won against the dollar,” Jeong said.

But the strengthening local currency is arousing concern that it might dampen exports, which have bolstered the recovery of the domestic economy.

“Earnings of electronics companies and automakers, in particular, could be affected by the stronger won,” said Park Jung-seop, an analyst at Daishin Securities Co. “Still, their share prices would not likely decline sharply, because international investors seem to consider that these companies are competitive in the long run, based on their increasing global market share and other indicators. In addition, a higher local currency will benefit companies depending greatly on imports for their material supplies, such as steelmakers. Accordingly, the appreciation of the won should not have a big negative effect on the general Seoul stock market.”

The benchmark Kospi index slipped 0.4 percent to 1,711.47 yesterday, after a sharp gain on Tuesday. However, foreign investors bought more than they sold for the 14th straight trading session.

Korea Investment & Securities Co. said in a report last week that, in expectation that the won will rise further, foreign investors could continue to buy Seoul stocks because foreign holders of Korean shares can gain profit from the won’s strengthening even if the stock prices do not rise sharply.

According to a report Tuesday by the Korea Institute of Finance, local think tanks forecast the greenback will be around 1,150 won at the end of this year, while major foreign financial institutions forecast the dollar would range between 1,150 won to 1,185 won in the fourth quarter. The KIF added that most economists believe the won’s appreciation will not immediately affect exports because the Japanese yen is also strengthening.



By Moon So-young [symoon@joongang.co.kr]
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