Forex Blog

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Korean Won Rises Despite Currency War Posted: 07 Oct 2010 03:55 PM PDT The Bank of Korea is one of the major participants in the ongoing global currency war, intervening on behalf of the Won to the tune of $1 Billion per day! Meanwhile, the Korean Won has risen 5% in the last month, and 10% over the last three months, the highest in Asia. What a disconnect! First of all, what’s behind the Korean Won’s rise? In a word, everything. At the moment, things couldn’t be going any better for the Korea Won. The economy is booming. The current account / trade surplus is on pace to surpass forecasts. The Central Bank has hiked its benchmark interest rate once already to 2.25%, and will probably hike again this month. In addition. even though Korean indebtedness is rising, “It is ranked 99th among 129 nations in terms of the ratio of public debt to the gross domestic product (GDP), which means the country's balance sheet is healthier than most other nations in the world.” Added another analyst, “In this period where there's a lot of concern about debtor nations, countries that are considered to have higher credit scores will benefit.” While the Korean stock market has surged (13% this ear and 50% last year), it still remains 25% below its 2007 peak and is trading at valuations well below other Asian countries. It’s no wonder that foreign investors have been net buyers of Korean stocks: “Foreigners have bought more Korean shares than they sold every day for four weeks and net purchases for the year amount to some $13 billion.” It doesn’t hurt investors that the currency is appreciating and that interest rates are rising; at the moment, there really isn’t much downside from investing in Korea. Meanwhile, the US (Federal Reserve Bank) is contemplating an expansion of its quantitative easing program, and other Central Banks may follow suit. Under the (now fading) paradigm of risk aversion, concerns of economic decline in the industrialized world would have been accompanied by a sell-off in emerging markets and capital flight to safe havens. As evidenced by the spike in the Korean Won and other emerging market currencies, such is no longer the case. Enter the Bank of Korea (BOK). It is widely known that the South Korean economy is highly dependent on exports, which could be negatively impacted by a rising currency: “For every one percent gain of the won against the U.S. dollar, the nation's export and gross domestic product decreases by 0.05 percent and 0.07 percent each.” Moreover, South Korea competes directly with Japan, which means the KRW-JPY exchange rate is of crucial importance to the Bank of Korea. Of course, both currencies had been appreciating at a similar clip. Once the Bank of Japan intervened, however, the BOK had no choice bu to double-down on its own efforts. The Bank of Korea seems to appreciate that there is only so much it can do. Intervention is not cheap, and its foreign exchange reserves have since surged to $290 Billion. It is also not very effective, and the Korean Won has continued to rise. Finally, the currency intervention contradicts the BOK’s efforts to contain rising prices. By not raising interest rates and trying to hold its currency down, it risks stoking inflation. What’s more – South Korea is actually hosting this week’s G20 summit, at which currency intervention is expected to be a major topic of discussion. It would be awkward, to say the least, if Korea’s own currency intervention was broached. Thus, it seems the Korean Won is destined to keep rising. It, too, is well below its 2007 peak, and there is scope for further appreciation. The BOK will continue to make token attempts at halting its rise, but at this point, the forces that is fighting against – bullish investors and other Central Banks – are too great.

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