The Korean won has been gaining against the U.S. dollar since the second half of last year, raising concerns among policymakers about whether the exchange rate will break the psychological threshold of 1,000 won per dollar.
Korea has maintained its policy, even through currency intervention, for a weak won as a means to support exports, the country’s main growth driver, as a strong won makes Korean products more expensive overseas.
Should the won show signs of gaining further, the government is most likely to intervene as policymakers at the central bank and the Finance Ministry said that Korea would need to be ready with measures against a stronger won.
“The government will try to (temporarily) control the pace of the local currency’s gain,” said Seo Dae-il, an analyst at KDB Daewoo Securities.
The general consensus is that the won is not likely to get stronger as the U.S. recovers this year, while the Korean economy is expected to lose some of its luster going forward.
Analysts said that the market would see a movement away from the trend of overseas currencies, such as the dollar had been flowing into Korea and other Asian emerging markets for investments in high-yielding assets amid monetary easing in the U.S. and Europe.
This trend, which had held relatively firm until late last year, increased demand for the won.
However, a gradual U.S. recovery will lead to a stronger dollar, with investors likely to keep their money in the world’s largest economy.
“An expected recovery in the U.S. will maintain the won’s weakness,” said Oh Dong-seok, an analyst at E-Trade Securities Korea.
Korea, which has relatively low interest rates, on the other hand, is headed toward a low-growth period, coupled with increasing household debt, casting doubt over its economic resilience.
A weak economy will call for a lower interest rate, which would boost the money supply, leading to a weaker won.
The won-dollar exchange rate closed at 1,061.5 won on Thursday.
By Chung Joo-won (firstname.lastname@example.org