S Korea: time to intervene?

The Korean won’s recent strength is causing deepening unease among government officials concerned about its impact on export competitiveness and the appeal of Korean equities to foreign investors.

The won retreated on Monday after hitting a near a one-year high last week, as investors were disappointed by a lack of progress at a EU leaders’ meeting on Friday and by poor earnings from US companies. It inched down 0.1 per cent to close at Won1,104.25 to the dollar in Seoul, snapping a seven-day winning streak on an influx of money to emerging markets sparked by the latest round of global monetary easing.

Still, traders remain wary of possible intervention to curb the won’s rally, after Hong Kong’s authorities moved on Friday to weaken the Hong Kong dollar for the first time in nearly three years, while the Bank of Japan has recently threatened to slow the yen’s appreciation.

The won has strengthened 4.4 per cent against the dollar this year, the third-best performance among Asia’s 11 most-used currencies. But analysts say the won is still undervalued by about 15 to 20 per cent and it is expected to continue its upward trend, given the country’s strong trade surplus and investors’ growing confidence in Asia’s fourth-largest economy.

“It is a matter of pace rather than the direction. The won is expected to continue rising gradually amid increased market liquidity,” says Kim Byung-yun, economist at Woori Investment & Securities. “The government has tolerated its recent strength but it could intervene in the market if the won rises sharply above Won1,100 as the stronger won would negatively affect exports and corporate earnings.”

South Korea’s exports fell 1.8 per cent year on year last month after dropping 6.2 per cent in August, as demand for export items such as chips, ships and cars cooled in the global economic slowdown. The country’s gross domestic product grew 2.3 per cent in the second quarter from a year earlier, the slowest pace in almost three years.

Analysts say foreign investors tend to become net sellers in the stock market when the won rises above Won1,100, worried by the impact on exports and corporate earnings. According to the Korea Exchange, operating profit margins of listed Korean companies fell by nearly six percentage points between 2004 and 2007, when the won appreciated more than 20 per cent. The benchmark Kospi index edged 0.1 per cent lower on Monday with foreign investors selling a net Won79.1bn of local shares.

But Kim at Woori expects foreign investors to retain their stockholdings in Korea at least until the end of this year, waiting for year-end dividend payments and further foreign exchange gains, unless the won appreciates too rapidly. He also notes that some shares such as oil refiners, shipbuilders, airlines and travel operators could benefit from the stronger won. However, that does not seem to be enough to convince Korean authorities to refrain from intervening in the currency market while the economy is slowing so quickly.

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