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Will Weaker Dollar Hamper Korea’s Recovery?

Posted September. 12, 2009 03:28,   


As the U.S. dollar has weakened over the past several days on the global financial market, observers have paid much attention to how a weakening dollar will affect a rapidly growing Korean economy.

The U.S. Dollar Index, an index of the greenback’s value relative to a basket of six foreign currencies including the euro, pound and yen, fell to 76.78 Thursday, the lowest level since September last year.

Yesterday, the dollar was traded at 91.07 yen, a seven-month low, and 1,221.8 to the Korean won, losing ground for the seventh straight trading day.

In the wake of the weaker dollar, oil prices soared. The price of West Texas intermediate for October delivery rose 84 cents, or 1.2 percent, to 72.15 dollars per barrel yesterday.

○ U.S. economic jitters weaken greenback

The dollar has weakened due to expectations of global economy recovery and fears over U.S. recovery. Shortly after Lehman Brothers collapsed last year, investors poured their money into the dollar, which was considered a safe asset.

Encouraged by the global economy recovery, investors have chosen risky assets that have weakened the dollar’s value. Prospects of a U.S. exit strategy later than expected have accelerated the pace of the dollar’s weakening.

In a recent report, Goldman Sachs said, “The U.S. has just begun passing through the first phase of household debt adjustment. Growth will fall one or two percentage points over the next two to three years due to debt adjustment and consumption slowdown.”

Goldman Sachs predicts that the U.S. will maintain its zero interest rate policy until next year.

A surge in dollar carry trade, referring to a phenomenon in which investors borrow dollars at low interest rates and invest dollars into foreign currencies or assets, has also accelerated the weakening of the dollar.

The recent price hike in gold, oil and raw materials has been largely attributable to China, which has bought oil, gold and nonferrous metals to prepare itself against a weaker dollar.

○ Will dollar’s weakening contribute to Korean growth?

A weaker dollar is a double-edged sword for Korea’s economy. From first glance, a drop in the won-dollar rate could weaken the price competitiveness of Korean exports.

Undeniably, Korean exporters could have benefited much from a strong dollar since the outbreak of the global financial crisis. In this year’s first half, Korea’s trade balance improved 27.7 billion dollars from the previous year.

On the other hand, Japan’s trade balance worsened 28 billion dollars over the same period. A weaker greenback could burden corporations since the prices of certain international raw materials move in the opposite direction to the dollar’s value.

Nevertheless, certain observers explain that a drop in the won-dollar rate will be positive for Korea’s economy. Though Korea’s currency has stayed strong against dollar, it has remained weak against other currencies.

Since late June, the won-dollar rate has fallen 52.1 points but the won-yen rate has jumped 10.94 won per 100 yen. That means Korea’s carmakers and IT companies can maintain their competitiveness against the Japanese.

The impact of the won-dollar rate on Korea’s exports has significantly declined. According to the Bank of Korea, the rate raised Korean exports one percent, bigger than 0.5 percent until 1995, but it has fallen below 0.3 percent since the currency crisis in the late 1990s.

Surging demand for exports resulting from the global economic recovery also sends a positive signal. A stronger won can ease the burden on Korean companies importing raw materials.

Ju Sang-cheol of Kyobo Securities said, “Over the past several years, Korean companies have strengthened their competitiveness in quality and marketing as well as price. Accordingly, a weaker dollar will not burden Korean companies much. If the won gets stronger smoothly, Korea’s gain will exceed its loss.”