The Korean won is continuing to appreciate against the U.S. dollar. The rise of the currency’s value requires both government and business to work to minimize its negative effects and maximize its positive effects on the Korean economy.
Last week, the Korean currency peaked at 1,017 won against the greenback, its strongest level in five years and 10 months. Some experts now forecast that it may go below 1,000 won per dollar, which has not happened since July 2008.
There are ample reasons for the won to rise quickly. Most of all, the dollar is weakening due to the lackluster performance of the U.S. economy.
On Korea’s part, it would be strange if its currency did not strengthen: It recorded a current account surplus for 26 consecutive months; its foreign exchange reserves amount to $358.8 billion; it has drawn over $10 billion in foreign direct investment so far this year; and foreign investors continue to buy Korean stocks.
This inflow of foreign funds results in the appreciation of the local currency. What should be noted is that the recent pace of the won’s increase in value is one of the fastest in the world. For instance, the won rose 7 percent against the U.S. dollar in one year, of which a 3.05 percent increase came in April alone.
Such a fast pace certainly is a cause for concern as it will negatively affect exports, especially shipments from small- and medium-sized enterprises. Some Korean companies, big and small, have been fortifying themselves against foreign exchange risks by expanding overseas production and diversifying payment currencies.
Nevertheless, exporters should make more efforts, such as cost cutting, technological innovation and gaining new markets to minimize the strong won’s impact.
The won’s appreciation has upsides, too. As the value of the currency goes up, its purchasing power increases, which helps boost imports and domestic consumption. Of Korea’s $1.75 trillion trade volume in 2013, imports amounted to nearly half at $515.5 billion. This alone shows that imports also play a big part in the Korean economy.
A strong won boosts domestic consumption as it makes foreign goods and services cheaper. In view of the chilling impact of the Sewol ferry disaster on the local economy, bolstering domestic demand and consumer spending are all the more important.
As the won is expected to keep rising, both government and industry should exercise wisdom to make it of benefit to the Korean economy.
