Strong won hellish at home, heavenly abroad

Chung So-young spent $800 in less than an hour on branded clothes and shoes in Chicago in June as the surging Korean won made prices irresistible.

“I found myself hesitating less as a dollar only cost about 1,000 won,” the 35-year-old manager at a Seoul-based biotechnology company said by phone last week. “I felt like I’d be forgoing an opportunity if I didn’t buy now.”

Chung is among 1.29 million Koreans who spent a record $1.7 billion abroad in June as the won soared to levels last seen in 2008.

Asia’s best currency performance over the last six months has made overseas holidays and shopping cheaper, while hindering efforts to reverse a slump in domestic spending that President Park Geun-hye has said risks pushing the region’s fourth-largest economy into a “long tunnel” of depression.

“Currency appreciation increases purchasing power, but we need to watch where the spending flows to,” said Bae Min-keun, an economist at LG Economic Research Institute in Seoul. “A stronger won contributes little to domestic consumption, while posing risks to exporters. I expect the government to continue slowing its appreciation.”

The won reached 1,008.37 on July 4, the strongest in six years, and has since weakened on speculation the Bank of Korea will reduce its benchmark interest rate to complement the government’s efforts to boost economic growth.

Finance Minister Choi Kyung-hwan unveiled a plan on July 24 to increase fiscal spending by 11.7 trillion won ($11.3 billion) in the second half of this year, after the government lowered its 2014 growth forecast to 3.7 percent from 3.9 percent.

Korea’s economy, beset by a slump in growth amid low inflation and a record current-account surplus, risks following Japan’s “lost 20 years,” the ministry said in a statement the same day.

Choi said on July 30 that exchange-rate volatility is hurting the profitability of exporters. He said during his nomination hearing on July 8 that smoothing operations are necessary to reduce currency fluctuations.

Hyundai Motor, Korea’s largest automaker, and Samsung Electronics, the world’s biggest smartphone maker, cited the strong won as a reason for declines in their earnings last quarter.

Goldman Sachs Group, Barclays, ING Groep and Nomura Holdings are among banks that have reversed calls that the central bank either raise rates or keep them unchanged, and now predict a cut. Six of 23 analysts surveyed from July 17 to July 22 expect a reduction to 2.25 percent from 2.5 percent this quarter.

The Bank of Korea next reviews policy Aug. 14.

While the median estimate of 28 analysts surveyed is for the won to appreciate 1.3 percent to 1,018 per dollar by the end of the year, BNP Paribas recommends selling the currency on bets the BOK will cut borrowing costs.

“The BOK is under intense pressure from the government to ease monetary policy and would be happy to see the won weaken to reduce pressure,” Mirza Baig and Jasmine Poh, Singapore-based strategists at BNP, wrote in a July 31 report.

Credit Suisse Group, however, expects the won to advance to as high as 1,000 per dollar this year and to 975 in 2015 on bets Korea’s current-account surplus will widen as recoveries in the nation’s overseas markets boost exports.

“We expect a huge current-account surplus coming with improving exports and signs that the United States, China and even the euro area all are growing,” Ray Farris, global head of currency strategy at Credit Suisse in Singapore, said in an email interview yesterday. “The amount of fiscal stimulus by Korea’s government to support domestic demand is pretty small, and history doesn’t support the idea it will boost imports.”

The Finance Ministry on July 24 raised its projection for the surplus in the broadest measure of trade to 5 percent of gross domestic product from 3.4 percent.

Farris said that while he expects Korean authorities to intervene in the currency market, they will probably allow some appreciation in the won.

Overseas spending by Koreans increased 23 percent in June from a year earlier, latest central bank figures show, while private-sector consumption shrank 0.3 percent last quarter from the preceding three months.

Some 7.7 million Koreans traveled abroad in the first six months, 5 percent more than a year earlier, Korea Immigration Service data show.

Koreans spent $718.4 million on goods bought online from retailers based overseas in the first half, or 70 percent of the total in 2013, Korea Customs Service data show. Sales at local department and discount stores fell in four of the first six months, official figures show.

Chung in Seoul is hoping the won will remain strong when she takes her next business trip in a few months.

“I’m visiting the United States again in early October,” she said. “I plan to buy some winter coats if the exchange rate still remains favorable, as prices will be much lower than in Korea.”

Bloomberg