Top forecasters say Korea will defy U.S. on won

Korea is set to defy U.S. pressure for won intervention to be reined in and will engineer a weaker exchange rate to support exports, top forecasters say.

The currency will drop 3.7 percent to 1,140 per dollar by the end of June, according to Australia & New Zealand Banking Group, which Bloomberg data show had the most-accurate estimates over the last four quarters. ABN Amro Bank NV, ranked third, predicts a decline to 1,120. While the won fell in the past month to the weakest since July 2013 versus the greenback, it climbed to the strongest levels in at least seven years against the euro and the yen.

“The won is overvalued, particularly against the Japanese yen, and that’s having a negative impact on growth,” Khoon Goh, a Singapore-based senior strategist at ANZ, said.

“We might see the Bank of Korea having to do more and needing to cut interest rates further in order to try boosting domestic demand and that, in turn, could be a catalyst for won weakness.”

Korean exports fell in each of the last three months and the central bank on April 9 lowered its 2015 projections for overseas sales and economic growth.

Gov. Lee Ju-yeol said that day authorities were closely monitoring won moves against the currency of Japan, home to some of the biggest competitors of Samsung Electronics and Hyundai Motor.

The U.S. Treasury said last week that it stepped up discussions with Korea over the latter’s exchange-rate intervention, which appeared to have “substantially increased” in December and January.

The criticism was rebuffed, with Song In-chang, director general at the Finance Ministry, saying there would be no change to its policy of conducting smoothing operations at times of currency volatility.

Hyundai Motor Korea’s biggest automaker, reported a 14 percent drop in net income for 2014 and sold 3.6 percent fewer vehicles abroad in the first quarter than it did a year earlier. Subsidiary Kia Motors suffered a 22 percent drop in profits last year, with earnings in the fourth quarter collapsing 54 percent.

“Corporate performances started to show an adverse impact from the overvalued won,” James Huh, an economist at Samsung Securities said. “The yen-weakening trend has been in place for two years, and we saw the euro tumbling in the last three to four months. The impact will start to emerge.”

The won has strengthened 11 percent versus the yen in the past 12 months and surged 24 percent against the euro as Bank of Japan and the European Central Bank boosted bond-buying stimulus to support their economies.

While Korea’s exports to the United States increased 13 percent in the first quarter, sales to Japan and the European Union each shrank more than 20 percent, official data show. A Bank of International Settlements gauge of the won’s value against a basket of trade-weighted currencies climbed in January to the highest level since February 2008.

The U.S. Treasury comments on South Korean intervention were made in a semiannual report on foreign-exchange policies released last week. The Asian nation was criticized for curbing won appreciation even as the country runs a current-account surplus equivalent to 6 percent of gross domestic product.

“For a small open economy like Korea, the impact from exchange-rate swings is significant,” Seo Jeong-hun, an economist at Korea Exchange Bank said.

“If the authorities ignore the impact, a part of the economy could be damaged seriously. They will not just sit and watch.”

Bloomberg