Korea, Taiwan accept appreciation

Korea and Taiwan declared a cease-fire in Asia’s currency wars.

The Korean won and Taiwanese dollar posted the biggest gains among 11 Asian currencies tracked by Bloomberg this month on speculation their central banks have stepped back from intervening to weaken the exchange rates. The won touched a five and a half year high of 1,031.55 per U.S. dollar on April 10, which allowed Taiwanese policy makers to let their currency reach a three-month high of NT$29.91 the same day.

“The won’s strength is giving the Taiwan dollar room to gain because the economies compete, to a certain extent, on exports,” Frances Cheung, the Hong Kong-based head of Asian rates strategy at France’s third-biggest bank, said April 17 by email. “Korean authorities” are “less worried about appreciation,” she said.

The Asian economies compete with one another in shipping electronic components overseas, and both count China, the world’s second-largest economy, as their biggest export market. A lower exchange rate makes a nation more competitive in selling goods, and traders have speculated for years that Taiwan and Korea have regularly entered foreign-exchange markets to sell and weaken their currencies.

Intervention by both central banks has become less important after a slide in the currencies earlier this year. Now, with 18 of 24 emerging-market currencies rallying this month, there’s also less need for Korea and Taiwan to make themselves competitive.

“There’s no great justification for Korean intervention at the moment,” James Huh, an economist at Samsung Securities in Seoul, said by phone on April 17. “Emerging-market currencies are appreciating overall, and it will be hard to guarantee intervention will be effective.”

Bank of Korea officials have warned several times since last year that they may intervene to counter the “herd behavior” of currency speculators, and strategists speculated they moved beyond rhetoric to sell the won and defend a level of 1,050 per dollar. Korea’s intervention has tended to be more active in the face of appreciation, and the authorities’ actions should be limited to smoothing disorderly market conditions, the International Monetary Fund wrote in a report released April 17.

Intervention has cost Korea’s central bank 39 trillion won ($37.6 billion) since the start of 2009, Morgan Stanley estimates. Policy makers stepped up their actions whenever the won approached 1,048 per dollar, strategists led by Hong Kong-based Geoffrey Kendrick wrote in an April 9 report.

Korean exporters have become less vulnerable to exchange rates, Finance Minister Hyun Oh-seok told reporters in Seoul on April 9, while declining to comment on whether the nation intervenes. The central bank will act to stabilize markets, BOK Governor Lee Ju-yeol said at an April 10 briefing.

“Taiwan’s central bank benchmarks itself against Korea, which it regards as a trade competitor,” Wai Ho Leong, a senior regional economist at Barclays in Singapore, said in an April 14 phone interview. “They always try to underperform the won and pay attention to its day-to-day movement.”

Bloomberg