Exchange Trouble
The appreciation of the won is threatening the Korean economy by affecting exporters’ profitability and economic fundamentals in general.
The Korean government is in no position to release money for currency depreciation right now. Its options are limited to a smoothing operation and verbal intervention, with the United States keeping an eye on it. Direct means for blocking the weak yen are even more limited, because direct transactions between the won and the yen are not allowed in Korea. This means that automakers, steelmakers, and shipbuilders are highly likely to face mounting difficulties with time.
On April 28, the won-yen exchange rate dipped below 900 won per 100 yen for the first time in seven years and two months, and closed at 898.56 won per 100 yen. The won-dollar rate closed at 1,070 won per U.S. dollar.
Deputy Prime Minister Choi Kyung-hwan said on April 24 that he is closely watching the movement. The financial authorities also mentioned that fine tuning measures may be adopted if the lopsidedness continues. Both of them are rather tied up though. Measures such as an interest rate cut, reserve money expansion, or quantitative easing are hard to choose in view of the exchange rate.
Experts predict that the strong won will be continuing for a while due to Japan’s quantitative easing and phased interest rate increased by the United States. In the short term, the exchange rates are estimated to reach 850 won per 100 yen and 1,050 won per U.S. dollar.