KOSPI Hits Record High of 1402


By Na Jeong-ju
Staff Reporter


The Korean won Wednesday extended its rally against the dollar as the exchange rate fell below the psychological barrier of 1,000 won to dollar for the first time in eight months.
The won-dollar rate dropped 6.90 won to close at 998.50 won, the lowest since May 12, when it was 999.70 won, despite the government’s intervention. The won gained for the fourth straight day as weak investor sentiment for the greenback overshadowed the market.

The rate soared to 1,058.10 won to dollar on Oct. 24, but has since fallen as the United States signaled it would end the nearly two-year rate-hike campaign. Korea’s expanding currency account surplus on strong exports also encouraged investors to sell the dollar, analysts said.

A stronger won is expected to take a heavy toll on export-intensive industries. The Ministry of Finance and Economy (MOFE) said it is taking steps to stabilize the rate.

``We are paying keen attention to the movement of the exchange rate,’’ the ministry said in a statement. ``There are signs that the market is getting out of hands and is being swayed by some speculative forces. We believe it is inevitable to step in the market to bring it back on track.’’

The won’s strength also reflects prospects of stronger economic growth and higher interest rates amid bullish stock markets. The economic growth is expected to rise to 5 percent this year, forcing the Bank of Korea (BOK) to raise its key call rate targets further. The benchmark Korea Composite Stock Price Index (KOSPI) closed up 7.24 points or 0.51 percent at a fresh high of 1,402.11 Wednesday.

The won has gained strength despite a warning from the ministry that it may intervene in the foreign exchange market if the won-dollar rate breaks the 1,000-won mark.

Analysts expect the Korean won to extend its rally further, giving a huge psychological burden to investors. They agree the won’s rise will force export-oriented companies to cut exports, eroding its profitability. Yet, the situation is a lot different from in the past.

``Even a couple of years ago, Korean companies suffered a lot of damage as the foreign exchange market fluctuated. But such large companies as Samsung Electronics and LG Electronics have prepared measures to minimize its negative effects,’’ said Kim Il-goo, an analyst at Landmark Asset Management.

``Large companies usually have global operations. When the won-dollar rate falls, their revenue usually drops, but their production and distribution costs also fall at the same time. This means the won’s appreciation can improve their business conditions.’’

Kim said large firms are prepared to cushion the impact of won-dollar fluctuation, but small-and medium-sized companies (SMEs), which are dependent on local production for exports, will be hit hard.

``Most export-intensive SMEs are vulnerable to foreign exchange fluctuation. Their revenues will fall sharply as the won gains further,’’ Kim said.

Kang Hyun-chul, an analyst at Woori Investment and Securities, warned the won-dollar rate will drop faster and the margin will get bigger once the United States drops its tightening monetary policy.

``In the first half of the year, there is a possibility that the rate may fall to the 960 won level. It can break the 900 won plateau,’’ Kang said. ``If the rate remains in the triple digits, a rate fall can have more psychological impact on invest sentiment than it is over the 1,000-won level.’’

Samsung Electronics said its revenue from electronics and semiconductor exports will suffer 2 trillion won in losses if the won-dollar rate loses 100 won. To keep global competitiveness of its products, it has diversified settlement currencies, reducing its dependence on the dollar, the company said.



Currency traders work at a dealing room of the Korea Exchange Bank in Seoul, Wednesday as the graph on a currency monitor shows the dollar’s steep fall against the won. The won-dollar exchange rate closed at 998.50 won Wednesday, falling below the psychologically-significant 1,000-won mark for the first time in eight months.
/Korea Times Photo by Lee Ho-jae


Hyundai Motor also said the impact of the foreign exchange market fluctuation will be less than in the past because it has expanded its overseas operations.
The BOK said earlier robust exports and improved private spending will spur economic growth despite a slump in plant equipment investment and construction investment It raised the benchmark short-term call rate to 3.75 percent last month, the second rate hike in three months.

``We are confident that the economy will attain its potential growth rate in 2006 and in 2007,’’ BOK Governor Park Seung told reporters in December. ``We expect the economy to grow 5 percent in 2006 and 4.8 percent in 2007.’’

The central bank expects this year’s gross domestic product to grow 5 percent as recovery in domestic demand gathers momentum, the fastest pace since 2002 when it expanded 7 percent.

Earlier this week, Finance and Economy Minister Han Duck-Soo expressed strong confidence for the acceleration of economic rebounding this year, despite negative foreign exchange factors.

``Compared with last year, this year will not be bad...and overall economic conditions will improve,’’ Han said in a New Year’s message.

The ministry unveiled its economic policy blueprint last month based on expectations of an economic recovery backed by resilient exports and improving domestic consumption.

The BOK forecasts exports will grow 10.3 percent to $315 billion this year on strong demand for information and telecommunication equipment. Imports are expected to grow 11 percent to $290 billion.

jj@koreatimes.co.kr