(News Focus) Global currency wars feared to hurt Korean economy

By Kim Soo-yeon
SEOUL, Oct. 8 (Yonhap) -- Simmering currency wars among the world's major
economies are feared to add upward pressure on the Korean currency, raising
concerns over the erosion of its export competitiveness and a potential sudden
reversal of capital inflows, analysts say.
The currency dispute has taken a new twist after Japan stepped in the currency
market on Sept. 15 for the first time in more than six years in a bid to tame the
yen's ascent against the U.S. dollar that is threatening to crimp its fragile
recovery.
The U.S. and Europe are also ratcheting up their calls for China to allow its
currency to appreciate fast, claiming that what they see as an undervalued yuan
is giving an unfair export advantage to China, hurting balanced global growth.
Some emerging economies did not hesitate to join efforts to curb their
currencies' gains. On Monday, Brazil doubled a tax on purchases of local bonds by
foreigners to 4 percent.
Drives by major economies to push down the value of their currencies come as the
faltering growth and stubbornly high unemployment rates are luring them into
relying more on exports as a way to boost the growth, experts said.
"Currency dispute has heightened as talks about additional quantitative easing by
the U.S. Federal Reserve have been pounding the value of the greenback," said
Jeon Seung-ji, a currency analyst at Samsung Futures Co.
"Ample liquidity prompted by record-low interest rates and money printing are
putting upward pressure on Asian currencies, including the Korean unit."
The Bank of Japan on Tuesday cut its overnight rate target to a near zero and
pledged for asset purchases worth 5 trillion yen (US$60 billion). Still-languish
job data and Japan's rate cut are upping prospects that the Fed is set to start
another round of quantitative easing.
Analysts said amid global currency tensions, the Korean won is projected to be
under upward pressure, with some betting that the unit may rise to the 1,100
level to the greenback within this year. The local currency hit a five-month high
of 1,114.50 won to the dollar on Thursday before weakening to 1,120.30 won on
Friday.
The Korean currency has climbed about 4 percent to the dollar so far this year
amid brisk exports and sustained inflows of stock and bond funds. In September
alone, the won gained more than 5 percent against the dollar.
"Hopes for U.S. stimulus easing are weakening the dollar, and China's effort to
diversify its foreign exchange reserves is seen by some market watchers as an
intention to add upward pressure on currencies of its neighboring countries,"
said Jeong Young-sik, an economist at Samsung Economic Research Institute.
"But South Korea, the host of the G-20 summit in November, is in a dilemma as it
could not explicitly cap the won's gain."
Economists said the local currency's ascent is feared to hurt the country's
export-driven economy, and there remain concerns that massive dollar inflows
could be reversed when any emergency crops up.
"South Korea suffered from excessive capital outflows in the height of the global
financial crisis even though the cause was not originated from the country,"
Jeong said.
"To prevent the short-term money inflows from strengthening the won, there should
be further thorough monitoring against capital flows moving in and out of the
country."
Analysts also said policymakers at the Bank of Korea (BOK), South Korea's central
bank, would be in hot water at the monthly rate-setting session slated for
Thursday because a potential rate hike would put further upward pressure on the
won's gain.
The BOK took a pause for the second straight month in September on the global
recovery woes. But the country's consumer prices shot up 3.6 percent in September
from a year ago, indicating a buildup in inflationary pressure.
A widening rate gap with other countries invites more foreign capital inflows in
search of higher returns and gives strength to the currency, according to
analysts.
sooyeon@yna.co.kr
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