Epic Won

Something dear to the hearts of all foreigners is of course the value of the Korean won, in relation to the dollar, pound, euro, Bhutanese ngultrum, or whatever. And the good news is that right now, all signs are pointing towards a strengthening. Sejong looks likely to become Greater, and Shin Saimdang an even more ideal Confucian mother.

When interest rates rise, won-denominated investments become relatively more attractive to foreigners.

Why? First of all, the South Korean economy is flying right now, especially in comparison to anywhere in the West. Data out earlier this month showed that exports rose more than 30% year-on-year, with core industries like shipbuilding doing 70% more international business compared to 2010. Imports naturally increased too, but there was still a monthly trade surplus of over $3bn. This means greater demand for won.

Also, interest rates in Korea are almost certainly going up. Due to the higher cost of oil, and many other basic commodities, inflation has been picking up, hitting 4.7% recently. This means that there will be pressure on the Bank of Korea to raise rates, to hold inflation down. When interest rates rise, won-denominated investments become relatively more attractive to foreigners; this again increases demand for won.

Looking at a chart of the won versus the dollar, one thing really jumps out: we’re still not back to pre-crisis levels. One dollar bought just over 900 won in 2007, but when the trouble of 2008 hit, investors pulled their money out of Korea in a mad panic, driving the won down to 1500. Since then, the pattern has been one of slow backtracking.

Since 2008, the dollar has become increasingly discredited due to loose monetary policy and ‘quantitative easing’. Korea emerged from the crisis unscathed though, quickly returning to real growth, rather than the kind brought about by governments spending money they don’t have. And yet, the market is saying that the won should be worth around 20 percent less relative to the dollar compared to 2007. It’s a similar story with other currencies. I don’t agree with that, and that’s why I’m not sending any money home any time soon.

 

Daniel Tudor

About Daniel Tudor

Daniel Tudor is the Korea correspondent for The Economist. His book, ‘Korea: The Impossible Country,’ will be published by Tuttle in spring 2011. He often uses obscure British expressions which you can look up here. Find out more at daniel-tudor.com

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