S. Korea worries recent FX rate hike may dent export, financial market conditions

08:25, April 19, 2010      

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As the Seoul market is recently facing a sharp hike in the local currency, South Korea is worrying the appreciation may stand in the way of brisk export and financial market moves.

S. KOREAN WON EXPECTED TO CONTINUE CLIMBING AGAINST U.S. DOLLAR

On the back of continued trade surplus and global credit appraiser's sovereign rating upgrade, the South Korean won has been pulled up as high as 1,107.5 won, breaking the psychological bottom line of the 1,110 level.

Earlier in the week, global credit rating agency Moody's revised up sovereign ratings on South Korea from "A2" to "A1," which first boosted up investor sentiment in the nation's foreign exchange market.

The upward pressure on the local currency is growing stronger as foreign investors' appetite for risky assets is likely to keep rising.

According to local analysts, the local currency will likely keep up the upward trend for the time being.

"Weakening investor sentiment in risk-free assets, together with foreigners' growing preference of assets dominated in the South Korean won, is likely to rock the foreign exchange (FX) rate at the 1,100-won level," an analyst at Samsung Futures was quoted as saying by a local daily.

A scheduled public offering by South Korea's No. 1 Insurer Samsung Life will add to the appreciation, the analyst said.

Although the South Korean authority has launched a smoothing operation in a bid to adjust the FX rate, it seems not likely that the government will make changes to the trend in the near future.

While most experts expect the FX rate to reach as high as 1,050 won in the first half of 2010, South Korea during the second half may see a downturn in the rate due to a slowdown in foreign buying and a possible rate hike in the U.S., according to media reports.

A rise in crude oil prices will also affect the path of the FX rate in the long-term, which is also directly linked to the country's export conditions as well.

Despite various outlooks, local media in one voice forecast the local currency will continue to stay on a rise for the time being.

FX RATE HIKE LIKELY TO DAMPEN EXPORT, FINANCIAL MARKET RALLLIES

Amid a surge in the FX rate, market participants are worrying it may hurt recent rallies in the Seoul main bourse, while it also dents export outlooks.

According to Yonhap News Agency, while a rise in the FX rate usually brings in more foreign investors to the local stock market, too steep an advance may shrink investor sentiment as the rate may hit the bottom earlier than expected.

Thus, the recent hike is worried in that its faster-than- expected pace may turn down foreigners' net purchase moves, Yonhap said.

With respect to industries, IT and export shares are likely to be hard struck by the FX rate hike as they may see deterioration in profits on a stronger won, Yonhap added.

Although analysts expect the climbing won-U.S. dollar rate may shift investor sentiment within the local market, towards those less exposed to export conditions, it may turn out to be the other way.

Many an expert expects the threshold is somewhere around 1,100 won per U.S. dollar which will be the bottom line for the economy for the short term, while it may still be sustainable at 1,000 won against the greenback for the long term, Yonhap said.

GOV'T LIKELY TO INTERVENE IN FX MARKET

With respect to the volatile FX market, Hur Kyung-wook, vice finance minister, on Wednesday said he suspected that South Korea' s currency is currently "excessively" appreciated.

In a local TV interview, Hur also said the government will take "proper" measure if needed.

After the TV interview, market participants have been interpreting Hur's remarks as the government may step into the FX market when the hike continues at the current pace.

The government may also consider injection of the government- owned U.S. dollars in the market once the FX rate hits certain level, according to analysts.

Despite conflicting views on how far the government may go, it is certain that the South Korean government will have its grip on the FX market once it spots some imbalance in the market.

The South Korean government has been repeatedly reiterating that it will lead an accommodative monetary policy stance, while keeping up its expansionary macroeconomic measures.

South Korea's finance ministry at the end of 2009 forecasted the economy will grow at 5.0 percent in 2010.

Source:Xinhua

(Editor:黄蓓蓓)

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