Surging South Korean Won sparks alarm as risk to exports

The South Korean won’s rally faces resistance as it tests 1,100 versus the dollar, a level that some economists see as a red line for the nation’s export competitiveness.

Warnings from authorities are becoming forceful as the won quickly approaches this level. It retreated from around 1,105 on Monday after a finance ministry official described recent currency moves as excessive and said that authorities would take aggressive action to curb unwarranted volatility.

Strong Korean economic indicators and heavy foreign inflows have supported the won’s outperformance versus regional peers, helping push it up 5.7% this quarter. That’s despite a spate of warnings by officials since late October over the currency’s rapid gains. Hopes of a coronavirus vaccine and removal of U.S. election uncertainty have also supported demand for the risk-sensitive currency.

Authorities will remain on guard because 1,100 is a level that may start to harm exports, said Ha Keon-hyeong, an economist at Shinhan Investment Corp. Based on its real effective exchange rate, the currency is overvalued when it appreciates past 1,100 per dollar, Ha said.

With statements from South Korean and Thai authorities decrying the strength in their respective currencies, “investors will have to increasingly take potential intervention into account,” Alvin T. Tan, head of Asia FX Strategy at RBC Capital Markets in Hong Kong wrote in a note.

While the won’s advance to its strongest level since 2018 is bringing its economic impact to the forefront, Shinhan’s Ha sees the risk that it may rally again next year on improving indicators.

Others such as Park Sang-hyun, an economist at HI Investment & Securities, judge the won’s gains as justified on expectations that a rebound in China’s economy benefits Korea and in turn supports a higher won.

“The yuan may gain further as it remains 4-5% weaker compared to when U.S.-China tensions turned into a full blown trade war,” and that means the same for the won, said Park. A recovery in Korean exports and foreign inflows may see the won strengthen to 1,050 per dollar next year, he said.

Korean exports data for the first 20 days of this month will be released on Nov. 23. Exports rose in September for the first time since the pandemic took hold. They declined slightly in October.