S. Korea needs to prevent won from soaring vs yen, euro

South Korea needs to prevent the local currency from excessively appreciating against other currencies like the Japanese yen and euro by encouraging the moderate outflow of U.S. dollars to back up its export-oriented economy, a researcher said Tuesday.

"If the won rose against the yen and euro at a time of a strong dollar, its negative impact would be increased," Park Sung-wook, a researcher at the Korea Institute of Finance, said.

"The government should consider taking measures to induce the gradual outflow of foreign currency (U.S. dollars) brought into the country...through investments by foreign investors," said the researcher.

He said the government could lead the national pension fund and private companies to expand overseas investments to encourage the outflow.

Major investment banks expect the won-dollar rate to rise to reach 1,130 won at the end of 2015, compared with 1,099 won at the end of 2014. The won is projected to ascend to 904 won to 100 yen from 910 won during the same period.

As for an imminent rate hike by the U.S. Federal Reserve, South Korea is expected to face foreign outflows from its financial market but the impact will be limited due to the strong economic fundamentals of Asia's fourth-largest economy.

"If South Korea conducted an additional rate cut to stabilize the exchange rate, it would inflate domestic household debts and cause a rapid capital outflow, resulting in higher volatility in the financial market," he said.

"Increased key rates of the U.S. will also expand volatility in emerging markets," Park said. "The rate hike will likely attract liquidity across the world, and cause capital outflows especially from emerging countries."

The Fed is weighing the timing of its first interest-rate increase in nearly nine years, and analysts predict that the rise will come in June.

Global investment banks expect the U.S. key rate to reach 1 percent by the end of 2015, with the world's biggest economy on a clear recovery track.

If the Fed raises the rate sharply, a rapid foreign capital outflow could cause financial crises in vulnerable countries like Thailand, Indonesia, Argentina and Brazil, he noted.

"If the emerging countries suffer a financial crisis, South Korea will also see its financial market fluctuate more widely," Park said. "But considering indices on vulnerability to possible foreign capital outflows, South Korea is among the group with the highest resistance against the impact of a financial crisis overseas." (Yonhap)