Strong won requires vigilance

The Korean won just keeps on getting stronger. This week, it broke the psychological barrier of 1,050 won against the U.S. dollar, the lowest level since the financial crisis. It strengthened to 1,031 won Wednesday despite verbal intervention from financial authorities.

On a fundamental level, the won’s gain is reasonable. Korea’s current-account surplus last year reached $80 billion won ($77.2 million) and has raked in handsome black figures in February for the 24th month in a row. Shockwaves from the U.S. Federal Reserve’s tapering of quantitative easing have eased, spawning a new rush of foreign investment into Korean equities and bonds.

But what’s worrying is the pace of appreciation of the won - the sole gainer among neighboring Asian neighbors that are rivals on the export front. The Japanese yen continues to weaken thanks to large-scale easing by Japanese monetary authorities. The Chinese yuan’s strengthening has reversed course this year.

The long-standing theory that a strong won can hurt exports and the overall economy has diminished. Korean companies have shifted large parts of manufacturing base overseas, and they now compete on quality and technology rather than solely on price. Still, the exchange rate can be a strong factor in an export-reliant economy. It is naive to believe foreign exchange rates are determined entirely by market supply and demand. If that were so, advanced nations like the United States, Europe and Japan wouldn’t have to resort to monetary means to devalue their currencies to make prices more competitive and increase hiring.

Exports are a strong driver in our economy as domestic demand remains stubbornly sluggish due to depressed private consumption and corporate investment. In the long run, Korea must strengthen its resilience to external factors by advancing technology through research and development and striking more free trade agreements. For now, authorities must keep a watch on excessive volatility so the won doesn’t decouple too much from rival currencies.

JoongAng Ilbo, April 11, Page 34