SEOUL: South Korea's won could be Asia's surprise first casualty in any hint of an early rise in U.S. interest rates as its yield advantage over the dollar has plunged, while dividend payouts to investors overseas are poised to surge.
The U.S. dollar's value has headed upward as the Federal Reserve gets closer to begin raising its policy interest rate, whereas South Korea's central bank is under mounting pressure to cut its rate even further.
The yield premium of South Korea's 10-year treasury bonds over U.S. Treasuries has fallen to a more-than eight-year low of 24 basis points on a 4-week average basis from about 100 basis points two years ago.
Even with the contraction in yield spread, the won has fallen just 3.5 percent over the past year against the dollar, whereas the U.S. currency's value against a basket of major currencies jumped 21.5 percent in the same period.
In addition, South Korean companies led by Samsung Electronics and Hyundai Motor plan to boost dividend payouts by an average of 30 percent, which could cause billions of dollars in outflows starting next month.
"Those dividend-related outflows will present a definite headwind to won sentiment," said Jonathan Cavenagh, senior FX strategist with Westpac in Singapore, who expects the won to head downward in coming months.
Latest forecasts from 15 major global investment banks tip the won to weaken to around 1,145 per dollar by the end of this year from around 1,105 now.
South Korean companies pay about one-third of their annual dividends in April. This year, the amount paid to foreign investors is seen rising to about $4.3 billion from about $3.4 billion last year, Samsung Futures estimated, partly as a result of government pressure to lift dividend payouts.
Policymakers in South Korea have long referred to the shrinking bond yield spread as a key factor to consider when setting the country's economic policies, including interest rates.
But a protracted slump in domestic demand at a time of weak exports to China and Europe forced the Bank of Korea unexpectedly to lower the interest rate to record-low 1.75 percent early this month. Many analysts now expect another cut.
"It's not our baseline scenario for now, but there clearly are factors including the yield spread and dividend payout that could cause troubles at any time," said Jeong My-yeong, senior FX strategist at Samsung Futures in Seoul.
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