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Korean Won May Gain to 1100 in 18 Months, Wells Fargo Says

South Korea’s won may strengthen to the 1,125-1,100 level in 12 to 18 months as concern about conflicts with North Korea and derivatives regulation eases, according to Wells Fargo & Co.

Tension with North Korea after the sinking of a warship in March and regulatory uncertainty have pushed the won down 9 percent since the beginning of May, according to a note from Nick Bennenbroek, New York-based head of currency strategy.

“We don’t see ongoing regional tensions as a reason for further won weakness,” he wrote in the note dated yesterday. “The strength of Korea’s economic rebound should soon begin to pay dividends for the won.”

The won yesterday touched 1,207, the highest level in almost two weeks, as signs the global recovery will withstand Europe’s debt crisis spurred demand for emerging-market assets and prompted exporters to repatriate earnings.

Exports, manufacturing, investment and consumer spending are increasing, and foreign investors are beginning to buy Korean stocks, according to Bennenbroek, who adds that the government’s “resistance” to increasing interest rates is waning.

South Korea is joining developing nations including China, Brazil, Colombia and Russia in tightening rules on capital flows to limit swings in their currencies. New rules will require foreign bank branches to cut positions of foreign-exchange options and swaps to 250 percent of equity capital and domestic banks to 50 percent under changes recommended to President Lee Myung Bak’s regulatory reform committee, according to a statement on June 13.

Previous Periods

The legislation will stabilize the currency, which has fallen during previous periods of stress as investors fled riskier assets for the U.S. dollar, Bennenbroek wrote.

“The new lower limits should make the won less prone to this type of volatility while, importantly, Korean authorities also said the regulations aren’t aimed at setting a direction for the won or limiting portfolio investment,” he wrote. “The downside risk for the won stemming from the new regulations has largely disappeared, and indeed the formal announcement on the new derivative rules prompted won buying.”

The won closed yesterday at 1,210.75 per dollar in Seoul, according to data compiled by Bloomberg.

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