South Korea's effort to restrain a rising won looks like an exercise in futility: It's expensive, unlikely to work, and not needed to support exports. Intervention by the authorities, buying dollars and flooding the market with won, also contradicts efforts to control inflation caused by a rise in the money supply, analysts say.
Politicians want to appease manufacturers who worry a strong currency hurts export competitiveness, but the reality is that South Korea's exports are booming and the won will rise to where the market thinks it should be.
"The won overvalued? Yes, if we had the KOSPI at 1,500 and if the world economy was so bad that the Fed cut interest rates twice," said Oh Suk-tae, an economist at Citigroup. The Seoul stock market's benchmark index has recently roared past 2,000, before retreating 8 percent, and the world economy is faring better than many expected earlier in the year.
Recent central bank intervention and a global sell-off in riskier assets combined to push the won sharply below an almost 10-year high and away from what officials say is an overvalued level. That's unlikely to last.
The country's rise in exports - up 20 percent last month - rising interest rates, firm economic growth and a bright stock market all point to a higher won, analysts say. "They (Finance Ministry officials) may feel happy now with the won's recent drop, but everyone knows it's a temporary turbulence and the won will rise again. Exports are really strong and ship makers continue to win orders," Oh said.
On July 25, it was trading just 0.2 won away from a decade high against the dollar of 912.5, when the authorities stepped in with heavy dollar purchases, sending it into a 1 percent reverse.
On Tuesday, it traded around 923 won to the dollar. South Korea's foreign exchange reserves, the world's fifth-largest, expanded by $4.1 billion in July to $254.8 billion. Dealers estimate the Bank of Korea sold more than $2 billion worth of won during the last few days of the month.
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