Won may dip below 1,100 this year

Will the Korean won fall below 1,100 to the greenback? It is the one of the hottest topics being discussed by market analysts as the local currency, which hovered between 1,170 and 1,180 to the dollar in May and June, closed at 1,111.2 on Friday.

Last Monday, the won finished at 1,112, down 0.7 from the Oct. 5 close, after hitting a nadir of 1,109 during trading hours. This was the lowest intraday trading level since Oct. 31, 2011, according to analysts at the foreign exchange market.

Traders at Korea’s four major banks said the won could dip below 1,100 won by the end of the year in light of the extra money generated by the U.S. Fed’s quantitative easing and the European Central Bank’s bond buying program.

They attributed the fast appreciation of the won to external factors as foreign investors find the Korean market an attractive haven, especially after Moody’s, Fitch and Standard & Poor’s all raised the country’s sovereign rating.

Interest rates in Korea, Asia’s fourth-largest economy, are also higher than in other emerging economies, which has lured foreign investors, they said.

After Moody’s upgraded Korea’s credit rating from A1 to Aa3 on Aug. 27, foreign investors had made net purchases of 4.3 trillion won ($3.87 billion) in Korean won-denominated bonds as of Oct. 5. They also purchased a total of 8 trillion won in Korean stocks.

“Demand for the Korean won has spiked as the country has emerged as an ideal place for investment, in tandem with a global abundance of liquidity,” said Cho Jae-sung, a deputy director at Shinhan Bank’s Financial Engineering Center.

“The upward trend is likely to continue for the time being, as some of the incoming foreign funds are aimed at making foreign-exchange gains in anticipation of the won strengthening against the dollar,” he added.

Other analysts say the won’s climb could prove toxic at a time when the real economy is in bad shape.

Korean firms are suffering from slowing exports due to the sluggish global economy, and an appreciating won could deal another blow by making exports less competitive and undercutting manufacturers’ profits.

“The value of the won plunged during the financial crisis, but has now entered a recovery phase,” said Choi Woo-young, director of Hana Bank’s derivatives division.

“Even if it appreciates to 1,050 against the dollar, the impact on domestic firms will be limited as they may benefit from lower interest rates,” said Choi.

Market analysts said any exchange rate shock won’t be huge and is not likely to last for long, adding that the won is not expected to climb rapidly after it passes the 1,000-level.

“When political uncertainties like the U.S. fiscal problems and unrest in the Middle East become serious, the won will lose value as investors head to safe havens,” said Lee Jung-wook, the chief trader at Woori Bank.

Foreign exchange authorities said the time is not right for market intervention, but analysts think the government may step in to ease sentiment if the won shoots up too quickly.

The Bank of Korea cut its key rate by 0.25 percentage point to 2.75 percent last week to control the rate at which foreign funds flow into the market.

“The government hasn’t set a specific target for the currency rate,” said a senior official at the Ministry of Strategy and Finance.”

By Sohn Hae-yong, Kim Hye-mi [mijukim@joongang.co.kr]