As predicted, won strengthens

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As predicted, won strengthens

The foreign exchange market moved as expected on its first day open since the holiday last week.

The Korean won further appreciated from Thursday’s close at 1,020.5 won, to 1,016.2 won against the dollar yesterday. The foreign exchange market and stock markets were closed on Friday for Memorial Day.

The appreciation of the won was expected after the European Central Bank (ECB) last week reduced its key interest rate to a new low in an attempt to depress the euro and stimulate an economic recovery.

Mario Draghi, head of the ECB, on Thursday cut the base interest rate from 0.25 percent to 0.15 percent which led to the first negative deposit rate of 0.1 percent. In other words, for banks, depositing money in the central bank would only result in paying management costs rather than gaining from interest returns. The negative deposit rate instead should encourage banks to supply loans to corporate and retail customers to stimulate the economy.

The won, which was barely hanging on to the 1,020 level, immediately broke and strengthened.

Many market experts expected that the won will continue to appreciate as there are no other foreseeable factors that would turn the tide.

The won has been appreciating lately at a much faster rate than had been anticipated. It has been one of the most appreciated currencies, even among the emerging markets.

Since starting the year at 1,050 won to the dollar, the currency has appreciated more than 3 percent.

The continuous current account surplus rally that has lasted for 26 months has also contributed to the appreciation of the won. In fact, in the first four months, the accumulated surplus amounted to more than $29.4 billion won, which is 43 percent of the Bank of Korea’s year-end target of $68 trillion won.

Some market experts predicted the won could appreciate to 1,000 won against the dollar by the end of the year as advanced economies hoping to solidify their economic recovery will likely continue supplying liquidity in the market and most foreign investment will channel into emerging markets including Korea.

Morgan Stanley revised its projection on the won-dollar exchange. For the third quarter, it changed its outlook from 1,125 won against the greenback to 1,020 won and 1,000 won for the fourth quarter. It even projected that the won could appreciate to the 900 won range next year.

If the won drops below 1,000 won against the dollar, it would be the first time since July 2008.


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