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Don’t fear a stronger won

Published: 30 Oct. 2012, 20:38

The won has appreciated sharply despite the recent economic slowdown. It has risen 4.3 percent against the U.S. dollar since July. Other Asian currencies gained during the same period, but the Korean won’s performance stands out among them. Currencies of major economies like the United States, Britain and Japan all fell.

The sharp appreciation of the won’s value can immediately hurt the productivity of exporters and the price competitiveness of Korean products. Weakened price competitiveness amid sluggish overseas demand will worsen prospects for the Korean economy headed for a prolonged slowdown. Exports have already dropped due to the recessions in major markets.

Worse still, the won’s strengthening appears to be a trend. The dollar has been slipping since it broke the psychologically important 1,100 level on Thursday. Exporters are alarmed and some mid- and small-sized companies are already gripped with fear. The won’s appreciation is largely due to liquidity easing by the U.S. and European monetary authorities.

Their quantitative actions to stimulate their economies raised the value of Asian and other developing economies’ currencies. The capital from advanced economies flooded Asian markets with stronger fundamentals in search of better returns. Unless they buy back the capital, the loose money from advanced economies will likely continue to flow into the developing economies and strengthen currency values there.

Local authorities, however, cannot artificially defend the currency and reverse the trend. We cannot afford to interfere with the currency market and be blamed as manipulators as long as we maintain an open policy on capital and currency markets. We inevitably have to accept the strengthening trend and take countermeasures.

Authorities must first of all take action to prevent volatility and strengthen vigilance against sharp capital movements. Exporters should modify their marketing strategies in preparation for a stronger currency. They should develop and sell products based on quality and brand value instead of cheap prices. In the long run, the export-driven economy should shift more to local demand. Currency value reflects the strength of an economy. A strong won could dampen exports, but we need to accept it as a natural outcome of a stronger economy. Instead of fear, we must use the momentum to strengthen our fundamentals.