The Bank of Korea is poised to step up dollar purchases as the won’s world-beating rally to a six-year high saps exports, if history is any guide.
The CHART OF THE DAY tracks South Korea’s international reserves, which reached a record $360.9 billion last month, and the won’s advance against the greenback. The increase in reserves in recent months shows the central bank’s efforts to stem the won’s gains, according to the Canadian Imperial Bank of Commerce. The lower panel shows the change in the nation’s exports from a year earlier, which was negative in May for the first time in four months.
“Intervention is certainly a hurdle” to the won’s rally, said Patrick Bennett, a Hong Kong-based strategist at Canadian Imperial, the second-best forecaster for the won in the year through March 31 based on data compiled by Bloomberg. “Korean exports have handled the strength so far, but caution is needed from here.” He predicts the currency will weaken to 1,025 per dollar by the end of this year.
The won has strengthened 11.6 percent in 12 months to 1,015.80 against the greenback, the best performance among 31 major currencies tracked by Bloomberg. Its 4.8 percent advance this quarter contrasts with a 1.4 percent decline in the first three months of the year. South Korea’s foreign reserves increased last month by $5.07 billion, the most since October, to a record $360.9 billion, according to central bank data.
The won reached 1,015.25 per dollar on June 10, the strongest level since August 2008. Kim Seong Wook, a director in the finance ministry, said the same day that authorities are concerned about increased exchange-rate volatility and are reviewing measures to reduce swings. One-month implied volatility in the won, a gauge of expected moves in the exchange rate used to price options, fell to 5 percent yesterday, the lowest since January 2013.
Exports account for more than a half of South Korea’s gross domestic product. Samsung Electronics Co., the nation’s biggest company by market value, gets 90 percent of is revenue from overseas.
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