Exchange Rate to Fall to 1,150 won in 2nd Half

A private economic think-tank’s forecast of the won-dollar exchange rate plunging to 1,150 won to the greenback before the end of this year is ringing alarm bells for the country’s exporters, who fear weakening international price competitiveness.

The won-to-dollar rate reached 1,178.2 won as of July 11, down 6.3% from 1,258 won on April 4, the highest level of the year.

According to domestic and overseas FX forecasting institutions queried on Sunday, the won is expected to rise further as the dollar continues to lose value against major currencies.

Samsung Economic Research Institute (SERI) projected that the won-dollar exchange rate will fall to 1,150 won sometime in the second half of this year, resulting in an average rate of 1,178 won for 2003.

LG Economic Research Institute forecast earlier this year that the average exchange rate for the latter half of 2003 would drop to 1,190 won. However, it plans to lower its projection in consideration of the recent downward trend.

The Korea Institute of Finance projected an average exchange rate at 1,160 won in the second half of this year, citing foreign portfolio capital inflows and the current account surplus, along with the overall fall of the dollar.

The Bank of Korea (BOK) predicted a rate of 1,180 won on July 10, but there are many analysts who insist this figure is optimistic.

Forecasts for continued strengthening of the won are attributed to foreign portfolio capital inflows, combined with sluggish demand for dollars due to the domestic economic slowdown. In fact, foreign investors are channeling money into the country’s stock market and financial institutions are borrowing more money from abroad, whereas the demand for dollars has declined due to the sluggish economy.

International financial institutions expect the won-dollar rate to fall for the same reasons.

Morgan Stanley project the won-dollar rate to drop to 1,185 won by September, 1,150 won by late this year, and 1,100 won at the end of June next year. JP Morgan forecast that the U.S. dollar will cost 1,150 won by September and 1,100 won at the end of this year.

Goldman Sachs expects the rate at the end of this year will rise to 1,200 won, but then drop to 1,100 won at the end of July next year.

If exchange rates continue to fall, the profitability of exporters will worsen.

“A 10% appreciation of the won could reduce manufacturers’ ordinary profits against sales by 7-9 trillion won,” said Moon Woo-sik, a professor at Seoul National University.

The Korea International Trade Association (KITA) conducted a survey of 208 export companies, pointing out that an estimated reasonable exchange rate is 1,229 won against the dollar. It also noted that one in three Korean exporters are already experiencing worsening profitability.

Although the nation’s companies do little trouble competing with their Japanese counterparts, since the Yen has strengthened against the won. However, they could be hit hard by Chinese rivals, given that China’s fixed exchange rate system which pegs the yuan to the dollar makes Chinese exports cheaper when the dollar weakens.

“An exchange rate war is taking place all over the world since the U.S. has been trying to make the dollar weak for an economic recovery, and Japan and the EU are battling this situation,” said Byun Jae-young, a BOK economist. “It is extremely important for an export-driven country like Korea to stabilize won-to-dollar exchange rates,” he added.

Chi-Young Shin higgledy@donga.com