Asia`s Exchange Rates Pressured for Appreciation

It is notable that Fred Bergsten, the director of the Institute for International Economics (IIE), said that the value of the Chinese yuan should be appreciated by 25 percent and thus the Korean currency will be under pressure for a 10-percent appreciation, in the Korea-U.S business council held in Washington D.C. Although it was not an official request by the American business circle, the majority of economic experts say that the U.S. government and the businesses are cooperating to place more pressure on exchange rates.

The move by the U.S. was intended to speed up the economic recovery ahead of the presidential election next year. Suffering from the current account and budget deficits, the U.S. government hopes to raise the competitiveness of the American goods and improve the unfavorable trade balance with China and Japan by depreciating the dollar.

“Since the value of the euro has already been appreciated, it is natural that the U.S. is targeting Asia,” said Jung Moon-gun at the Samsung Economic Research Institute (SERI). “The remark of the Bergsten in the wake of the G7 statement can be construed as a full-blown strategy by the U.S. to pressure Asia for their currency appreciations,” he added.

The target of the U.S. is, first of all, China and Japan. However, Korea also is not free from the exchange rate battle.

As the U.S. said, if the won-dollar exchange rate falls 10 percent, it means 1,100 won for a dollar. Based on the exchange rate at 1,150 won for a dollar, if the won appreciates by 10 percent, the won-dollar exchange rate is 1,035 won for a dollar. When based on the exchange rate at 1,170 won for a dollar, a 10-percent appreciation means 1,053 won for a dollar.

“All the economic analysis at home and abroad are based on the won-dollar exchange rate at 1,100 won for a dollar,” said Ko Yoo-sun, an economist at MERITZ securities. “If such a lowest level breaks, there are few Korean companies that can maintain the international competitiveness,” he added.

If the won-to-dollar exchange rate plunges 10 percent, the total sales of the local manufacturing firms will decrease 5.1 percent on an average and the rate of ordinary profit will lose 3.0 percentage points.

“With the Korean economy extremely sluggish, exchange-rate plunges by outside factors will deal a fatal blow to exports in a short term, leading to a decline of the economic growth rate next year and protracted economic recovery to the latter half of next year,” said Shin Min-young, a senior researcher at the LG Economic Research Institute.

Joong-Hyun Park Ho-Won Choi sanjuck@donga.com bestiger@donga.com