It’s rising.
Compared to Asia’s other major currencies, the South Korean won is very volatile. Back in March of this year, the exchange rate was about 1,570 won to a dollar. Today it’s about 1,170 to a dollar, a differential of about 25% in just seven months.
Below is a table comparing the major Asian currencies to the dollar and the Korean won’s relative position:
| Currency vs. U.S. Dollar | 3/3/2009 | 10/3/2009 | % Change | |
| New Zealand dollar | 1.9888 | 1.3634 | 31.45 | |
| Australian dollar | 1.5612 | 1.1297 | 27.64 | |
| South Korean won | 1552.07 | 1168.77 | 24.70 | |
| Indonesian rupiah | 12004.8 | 9551.1 | 20.44 | |
| Singapore dollar | 1.5471 | 1.4039 | 9.26 | |
| Japanese yen | 97.6392 | 89.0782 | 8.77 | |
| Indian rupee | 51.6796 | 47.4839 | 8.12 | |
| Thai Baht | 36.2846 | 33.4194 | 7.90 | |
| Malaysian ringgit | 3.7223 | 3.4411 | 7.55 | |
| Chinese yuan | 6.8504 | 6.8364 | 0.20 | |
| Hong Kong dollar | 7.7563 | 7.7504 | 0.08 |
First of all, in the past seven months, from 3/3/2009 to 10/3/2009, all the major Asian currencies have appreciated against the U.S. dollar. As you may know, the dollar is taking a beating (a casualty of aggressive monetary policy to combat the recession). Obviously, the New Zealand and Australian dollars have appreciated the most, but the Korean won is the fastest appreciating currency in the continental or near-continental Asian region.
A big part of Korea’s recent surge in exports has been its low currency. Furthermore, a weak won has given Korean manufacturers a semi-artificial competitive advantage with the Japanese. Happy is Hyundai and Samsung. Woe is Toyota and Sony. So, for obvious reasons, the quickly rising won is worrying Korean government and industry. As a matter of fact, there is strong evidence that the Korean central bank (“BOK”) has recently intervened to slow down and/or arrest its appreciation.
South Korea is one of the few developed (or quasi-developed, according to an increasingly fewer number of sources) countries that have such a volatile currency. I’m not a currency expert and I do not yet know why the Korean currency has these odd and persistent characteristics, but if the won appreciates too fast, Korea’s boost in exports and economic recovery could be in trouble. To think, almost exactly a year ago I complained that it was falling too much.
A good MarketWatch article outlines the pluses and minuses of an appreciating won. Although on one hand, Korean exports may suffer, the Korean finance industry can experience higher priced Korean stocks and lower relative costs of debt (i.e. borrowing dollars can be cheaper). Again, like anything, there is a tipping point. Personally, I’m more comfortable with the won at 1,100 to a dollar than at 950.
{ 18 comments… read them below or add one }
I know I have been talking Indonesia all over these blogs today, but one last thing. I’m paid in USD here and have lost 20% of my salary since December. Same same with the assraping I took on the won when I was last in Korea. If I were inclined to believe in the supernatural, I would think the gods of FX hate me.
No, no. Brendon Carr orchestrated this one:
http://www.rjkoehler.com/2009/07/25/open-thread-110/#comment-340734
When the US economic crisis caused worldwide economic problems, I recall an economist saying that Korea was the hardest hit in Asia because its economy was fully integrated into the world financial system. This same economist said that Korea would also be one of the ones that recovers the fastest for the exact same reason.
I am more comfortable with it at 950 to the dollar, or even lower, but I will settle for 1,000.
When I was a kid I loved Saturday morning cartoons. There was this one Saturday morning cartoon on CBS called Dungeons & Dragons that I thought was really cool. It had modern day high school and elementary kids characters transported into a magical world of wizards, creatures, knights, warriors and dragons.
Okay, so what? Well, the guide and mentor for these group of teenagers is a good wizard called the Dungeon Master. The frustrated kids complain to the DM that if he’s really a wizard, why can’t he concoct a spell to get them back home? The DM replies that magic has it’s limitations and power used elsewhere can have adverse effects on an environment someplace else. To demonstrate his point, he gives one of the most self absorbed kids, Eric the Cavalier, his powers temporarily for a day. Eric creates a fountain to drink from and the DM warns that “… somewhere you are turning an oasis into a desert” (or something like that, the show WAS over 20 years ago).
The point of this is to demonstrate that like wizards, head bankers in a country’s central bank (be it the Fed or the BOK) can’t just make things happen out of thin air. You pull one monetary lever and you change or stress another financial situation. For example, to combat the recession, the U.S. Federal Reserve has kept interest rates extremely low and has printed a lot of money. The casualty of this has been the dollar. Its value has decline a lot since the begining of the year, hence talks regarding its current appropriateness as a global reserve currency. The BOK can also try to keep the won artificially low, but the casualty to this will be interest rates. Raise interest rates too high and you sink the economic recovery. However, if the BOK allows the won to go up too high too fast, then that will make exports too expensive and that will also sink the recovery.
Wangkon, by all means, please don’t be shy about letting out your inner dork.
“Furthermore, a weak won has given Korean manufacturers a semi-artificial competitive advantage with the Japanese. ”
When I walk into any electronic stores, I see Samsung’s sell at a higher price than Sony’s.
Korean makers are also cleaning up in the white goods appliances section. Most of the high end washers, fridges, and dishwashers are from Samsung or LG.
To me, this is a stunning turnaround, compared to just few years ago.
Mmm, I haven’t posted in a while so lemme try to tackle this one since it’s part of my research paper for my thesis…
One of the facets of the Korean economy in the past was a large trade deficit with many of it’s trade partners. It still retains these, but Korea’s trade deficit was pretty large relative to other countries. Probably brought on by a combination of increasing demand in electronic goods despite an appreciating won (I remember people considering 900won to the dollar as a plausible future threat), making Koreans able to afford a lot of international traveling and imports. So trade volumes became disproportionate despite the fact that Korea was an export-led nation.
So Korea was flying pretty high before the subprime crisis. Then banks got into trouble. One of the things to consider about the Korean won is that it is neither considered a “safe haven” currency nor a “transitional currency” meaning it isn’t saved heavily to retain value and it isn’t traded constantly to trade for other currencies. People trade it to bet on it. Banks had it in their reserve, but didn’t consider it to be a staple. And when the subprime hit and banks had to get some cash, they traded out their wons heavily as traders traded it out heavily, knowing that the Korean won was going to be :
A) Volatile
B) With a huge trade deficit with many other currencies, too greatly over-appreciated
So people dumped the currency since it was going to be cold very soon. The Korean government tried to stave it off by offering to buy it’s own currency with it’s reserve, which was effective for a little while to boost investor confidence and prevent a massive sell-out, but the demand was too high and it had to let go of it’s program. Korean money got traded off at an increasing rate, and investor fears led them to trade off Korean stocks as they lost relative value. This in turn, made people believe the Korean economy was worth even less, leading into a spiraling effect with a slight dose of self-inducing prophecies. The KOSPI melted, investor jitters on the bond issue made the Korean won a pariah, and people flocked to the dollar and the yen. The cost of goods in Korea rose (as import prices skyrocketed) and inflation took place even in domestic goods. Koreans saved money due to a couple reasons, including the fact that they couldn’t afford a lot of the more expensive goods, a declined appetite for even more expensive imports, and campaigns by banks to get people to save money.
Then came good news. The bond issue was not an issue. Trade deficits (with the won being cheap) came a little into balance. Korean did not go into a defined recession. The US FED initiated a fluid trade of currencies with Korea, beating off fears that Korea wouldn’t be able to buy it’s own currency back. The large amount of Korean savings meant that banks and individuals could clear debts. The cheap won made Korean companies very competitive internationally. They were money makers in a global recession.
Traders then realized that a lot of the trading off of the Korean won and its stocks were out of fear. Korea had good solid companies and good fundamentals in place. It now had an increasing savings rate, and stable trade balances. People felt good about Korea and started putting money back into it. KOSPI rose, the won appreciated, and people who were smart and bought won back at insane rates made some money.
Now the issue is that people are going to think the won is really hot and buy it beyond what is the “true” market value. If that happens, Korea may go into a recession as it’s products lose their competitive edge and blah blah blah.
The primary issue is that Korean volatility is largely due to investors considering Korea to be less than safe despite it’s status as a developed nation.
In a sell-off, between Korea and Japan, they will sell off Korea first, thinking it’s value is more prone to economic shocks. On the plus side, they will buy Korea first when they’re in the mood to buy, since they figure the volatility means greater profits.
To prevent this, the Korean government intervenes to cushion ascension and descension in the Korean won to prevent large swings in the currency. Large swings aren’t good because it makes pricing unpredictable, which leads to signals that that prices are volatile and the economic value of goods and companies will be volatile…
Woe is self-fulfilling prophecies in the world stage…
NK,
At least I’m not the engineer…
it’s good that you point to the difference between developed nation and developed market status. it is only recently that korea received the ftse developed market status. it was my understanding that the perceived volatility of the markets hinged primarily on the fear of corruption on par with what led up to ’97 and more importantly cousin numbnuts up north.
shrug,
I address Korea’s trade deficit problems here:
http://www.rjkoehler.com/2008/05/20/korea-still-dependent-on-japan/
It’s mostly with Japan. Korea can’t make many of their signature products (electronics and cars) without Japanese capital goods and subassemblies. Korea also imports a lot of raw materials. Yet, Korea has a net trade surplus with the rest of the world. However, it’s external debt is really high because it needs to borrow a lot of foreign currency to pay for its capital goods, subassemblies and raw materials. The Japanese want to be paid in yen, not won. Everyone else wants to be paid in dollars or Euros.
Due to this high external debt, the BOK is constrained in having flexibility in monetary policy. They can’t play with interest rates as much as the U.S. can.
To get out of this trap, the Koreans need to have a greater developed internal economy, particularly in business services. For example, a strong financial services sector would help a lot and make the won a lot more stronger, but sometimes a deeply stratified Confucianistic society does not tend to breed fire breathing, take over-the-world type bankers.
They can also have a greater number of smaller and medium sized business. Yet, the Korean system is geared more towards giving government aid to the chaebols and doesn’t know how to nurture businesses bigger than a mom & pop and smaller than an industrial conglomerate. Thus, Korea doesn’t have a lot of midsized subcomponent manufacturers and instead of making the dohickies that go into a Samsung Blu-Ray players and a Hyundai Sonata door frame, they go across the Korean Strait to buy those goods.
External debt, trade deficit, it’s all outflow. Point is that when the subprime crisis hit, it made investors realize how over-appreciated the value of the Korean won was and everyone dashed out the door.
Personally, I don’t think the BOK is particularly constrained in how it handles it’s monetary policy due to it’s debt. I think it’s constrained because of how intricately the Korean economy is tied into the economies of other nations and reacts violently to any changes in other nations. So it has to play a lot more wait-and-see strategies rather than the act-on-premise way the US and bigger nations develop their monetary policies.
Also, sure, Korea can use a greater developed internal economy. SMBs should play a bigger role. And if I had wheels, I’d be a truck. I wouldn’t blame Confucianism for this one. The limits of the geographic region (lack of internal raw resources and even land), the social paradigm (the dominance of chaebols), and the current global economic status (volatility kills up and comers more than anything) makes it impossible to ask for what you want.
PS: Much appreciate if you say you edited your comment if you do so.
Yeah, that’s the perk of the poster…
Feel free to add a postscript.
Methinks the won will be 1,000-1,050 to a dollar by year’s end.
The Korean economy has been on the rise for a few months…but…
This is happening when CNN is promoting an upcoming show on Korea’s economic recovery…Coincidence? I think not.
I’ll feel the world is right again when we reach 1000 — if the US dollar also recovers vs the other majors. If dollar remains weak, we “should” be at 900 or so… Gold is nearly $1070 now, whoa!
“Gold is nearly $1070 now, whoa!”
Yeah, but that’s like, what, 1.5 Euros?
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