Won Exchange Rate Hitting New Lows

Won-yen Exchange Rate Hit a Nine-year Low-

At Seoul’s foreign exchange market last Friday, the won-dollar exchange rate closed at 934.1 won, down 2.5 won from the previous day. The rate is the lowest in about half a year since May 12 (932.7 won).

The won-dollar exchange rate, which went up to 963.8 won on October 9 immediately after North Korea’s nuclear test, fell by around 30 won in just one month.

The won-yen exchange rate hit its nine-year low after dipping for five straight days (by business day). The won-yen exchange rate was 794.03 won to 100 yen last Friday, the lowest since November 14, 1997 (784.30 won).

Koo Gil-mo of Korea Exchange Bank (KEB) said, “The won value tends to go up because dollar-denominated export earnings increase at the end of the year.”

What Causes Strong Won Value?-

Falling foreign exchange rates against the dollar and yen are attributable to U.S. economic weakness, a weak dollar, Japan’s move to freeze interest rates, and the North Korean nuclear crisis being subsided.

U.S. economic growth in the third quarter (July to September) was just one percent. The recession in the manufacturing industry, coupled with falling consumer confidence, also deteriorated the U.S. economy. It is expected that protectionism and the push for a revaluation of foreign currencies through the weak dollar by the Democrats, who won the U.S. mid-term elections, will gain momentum.

Foreign exchange market experts forecast that the weak yen will continue for a while compared with the won as Japanese Prime Minister Shinzo Abe has been passive in raising interest rates for economic growth.

There is also a growing demand for won on the foreign exchange market since the concern of an armed or diplomatic conflict on or near the Korean peninsula has decreased following the North’s earlier-than-expected return to the six-party talks after its nuclear test.

Trade Balance Concerns-

The Ministry of Commerce, Industry and Energy is concerned that the trade balance for Korea’s biggest export markets, the U.S., China and Japan, will deteriorate due to the strong won. Korea recorded a loss of $14.597 billion in trade with Japan from January to July this year, up by $683 million from last year.

Meanwhile, Korea’s trade surplus with China decreased by $465 million from last year. Korea still maintains a trade surplus with the U.S., but the surplus tumbled to $47 million this year.

Yang Hyun-bong, a researcher of Korea Institute for Industrial Economics and Trade (KIET), noted, “Current foreign exchange rates are already below the break-even point,” and forecasted that in particular, exports of Korean goods competing with Japanese counterparts in the global market will be affected.

legman@donga.com