A Big Change in the Exchange Rate

The Korean won rose to an 11-month high against the dollar on September 24. The local currency closed at 1,194.4 won per dollar, smashing the 1,200 won level for the first time since last October. The local currency dropped to 1,570.3 won per dollar in early March due to the global financial meltdown. Some financial experts predict the won-dollar exchange rate will reach the 1.250 won level. This outlook is good news for Korean importers and travel agencies, but bad news for Korean exporters.

Globally, the value of the US dollar dropped significantly from this year’s peak. The dollar index rose to as high as 89 in March before dropping to the 70 level. A “Weak dollar” mean hope for a global economic recovery. Due to the global financial crisis, funds went to U.S. dollars as they were regarded safe assets. However, with signs of an economic recovery, these funds are now moving to riskier assets to create higher returns. In addition, the U.S. economy is showing the possibility of a double dip, further weakening the power of the U.S. greenback.

The Federal Reserve Board of the U.S. recently announced that U.S. consumer loans stood at US$2.47 trillion, a decrease of US$21.6 billion from the previous month. The drop was bigger than the US $4 billion analysts had predicted. This means U.S. consumers are still skeptical about an economic recovery, and are therefore reluctant to increase loans. Some analysts predict that after the U.S. government spends its entire budget to stimulate the economy, consumption will decrease greatly, resulting in a double dip.

Moreover, some experts now believe that the world economy should replace the current U.S. dollar-based system with a new one to prevent another global financial crisis. China is one of the most active advocates of this idea. Of late, the chairman of a central bank in Europe predicted that the euro currency will secure the same position the U.S. dollar has. These situations definitely undermine the status of the U.S. dollar.

Amid a drop in the value of the U.S. dollar in the global financial market, the Korean won has continued to gain strength. The Korean won gets stronger with an increase in U.S. dollars in Korea thanks to Korea’s favorable balance of international payments. At the end of August, the Bank of International Settlement said that the Korean won was undervalued by 16% or more.

The Korean won will stay between 1150 and 1200 against the dollar in the future, foreign investment banks such as Goldman Sachs have predicted. In particular, according to Goldman Sachs the won will stay at the 1200 level for approximately six months before reaching the 1150 level 12 months later. Some analysts have predicted the Korean won could reach the 1100 level.

However, a weakened dollar might become a wet blanket against the recovery of the Korean economy. A strong Korean won will give a blow to Korea’s exports as the Korean economy depends heavily on exports. A drop in the value of the dollar can effect international material prices and aggravate anxiety about inflation in the future. Therefore, Corporate Korea must cope with such a negative possibility.

If the won-dollar exchange rate drops to the 1100 level, small and medium-sized Korean export companies will lose their price competitiveness in the global market. In addition, Korean manufacturers of cars, electronic and telecommunication products will face a decrease in overseas orders as they enjoy the effects of a weak Korean won.

“The Korean government should devise effective policies to prevent the won-dollar exchange rate from taking a roller-coaster ride,” said a financial market expert. “The Korean government should also help companies deal with changes in the foreign exchange rate. As for Korean companies, they need to secure competitiveness to endure difficulties when the Korean won gets stronger.”