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(News Focus) S. Korean won's fall seen to last with no remedy in sight

All News 13:12 January 25, 2016

By Byun Duk-kun

SEOUL, Jan. 25 (Yonhap) -- The South Korean currency will likely keep falling against the U.S. dollar for some time and may drop as low as 1,300 won, with local authorities having little means or will to halt its slide, analysts here said Monday.

The local currency closed at 1,200.1 against the greenback Friday after dipping to 1,214.00 won two days earlier, the lowest level in over five years since 1,215.6 won posted on July 19, 2010.

The won's depreciation is largely attributed to a slowdown in the global economy, but also to the recent U.S. rate hike that has apparently prompted a mass outflow of foreign capital from Asia's fourth-largest economy.

As of Friday, foreign investors remained net sellers of South Korean shares for 35 consecutive sessions since Dec. 2, offloading some 6.2 trillion won (US$5.18 billion) over the cited period and lowering their combined stake in the South Korean stock market to 31.02 percent of overall market capitalization, the lowest since August 2009.

The U.S. Federal Reserve is expected to continue raising its key rate following its first rate hike in nearly a decade last month while the European Central Bank is expected to continue its quantitative easing, a move that may help boost growth in Europe but further push up the value of the U.S. dollar in the global market at the same time.

"We expect an additional U.S. rate hike to take place in or after June, keeping the won-dollar rate at around the current level for now but pushing it down to a new low in the second half of the year," said Lee Chang-mok, a researcher at NH Investment and Securities.

A recent report from NH Securities forecast the won-dollar exchange rate to reach 1,250 won against the dollar in the second half of the year.

Daishin Securities sees the rate reaching as low as 1,300 won due to uncertainties in the world's second-largest economy.

"The market may come to be stabilized for now, but in the long run, the foreign currency market and oil prices will again witness two or three large fluctuations as they are greatly affected by uncertainties in China," Daishin Securities researcher Cho Yoon-nam said.

Morgan Stanley, too, forecast the won-dollar exchange rate to find a new low this year at 1,300 won per dollar.

The problem is that local authorities may have little or no means to change the direction of flows of foreign capital, the market watchers said.

One of surest ways to prevent a capital outflow is to raise the country's own interest rate, offering higher yields for foreign investment and thus making the market more attractive.

A more serious problem is that the local authorities may be reluctant to even take what little means available to stop the won's depreciation, hoping it will help boost the country's exports that suffered an on-year drop every single month last year.

The BOK has kept its key rate frozen at a record low 1.5 percent since June in an attempt to help bolster growth.

"There may be many elements that could trigger capital outflow and they include financial market fluctuations in emerging market countries, namely China, the speed of the United States' monetary policy normalization and movements in global oil prices," BOK Gov. Lee Ju-yeol said on Jan. 14 when the BOK's monetary policy board decided to again keep its policy rate steady in January.

"However, our economy is differentiated from other emerging market countries in terms of economic fundamentals and foreign exchange soundness, so I believe the country's capital outflow will also be differentiated from those of other countries,"

Market watchers say that like in all other economic events, some stand to gain while others will suffer losses from the won's devaluation.

They said many exporting companies may enjoy a sudden boost to shipments with large, export-dependent automakers expected to benefit the most from a further decline in the value of the local currency that will provide them with additional price competitiveness.

According to NH Securities, the country's two leading automakers -- Hyundai Motor Co. and its smaller affiliate Kia Motors Corp. -- are expected to see each of their operating profits go up by nearly 1 trillion won if the average won-dollar exchange rate drops to 1,250 won per dollar this year.

The combined operating profit of 10 listed auto-related firms here, including Hyundai and Kia, is expected to spike 15.4 percent on-year to 16.58 trillion won, it said.

Such an effect, however, cannot last long, especially as the local carmakers continue to expand their overseas production, the analysts said.

"Japan had once sought to drive down the value of its local currency against the dollar and euro in an attempt to boost exports, but the move did not lead to an increase in its exports," the Korea Institute of Finance said in a recent report.

Others say the won's drop is a double-edged sword whose damage could far outweigh benefits.

"Traditionally, a drop in the won-dollar exchange rate has led to a rise in the profit of export companies. But a sudden drop, such as the recent drop in the value of the won, could highlight uncertainties, causing only an adverse reaction of the market such as an outflow of foreign capital," NH Securities researcher Lee said.

bdk@yna.co.kr
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