Resilient Won Extending Advance to BofA on Shipping

South Korea’s won is proving to be Asia’s most resilient currency as a recovery in exports from the world’s biggest shipyards outweighs gains in the dollar.

The won rose 1.8 percent against the greenback this month, the biggest gain of 11 Asian peers tracked by Bloomberg, after plunging 7 percent in the first half of 2013. Bank of America Corp. sees the won gaining 3.9 percent to 1,080 per dollar by year-end, while the median forecast of 29 analysts surveyed by Bloomberg is for a 2.2 percent drop to 1,147.

Ship deliveries, which as recently as 2011 were South Korea’s biggest exports, increased last month for the first time in a year amid a resurgence in global trade. That’s helping boost a current-account surplus that the Bank of Korea predicts will climb to a record $53 billion this year.

“Rising dollar flows from shipbuilders are in accord with the Bank of Korea’s optimistic forecast on its current-account surplus,” Lee Jaewoo, the chief Korea economist at Bank of America in Seoul, said in an interview. “The won is much more stable now.”

Asian Currencies

The won advanced to as high as 1,114.06 per dollar on July 17, the strongest level in more than a month, and climbed 0.4 percent, the most since July 11, to 1,121.75 at 12:43 p.m. in New York. The Singapore dollar and Thai baht were Asia’s next strongest currencies this month, gaining 0.3 percent and 0.1 percent, respectively.

The Indonesian rupiah led a July slump in the region, falling 1.5 percent to 10,078 per dollar and touching a four-year low of 10,126 today, according to prices from local banks compiled by Bloomberg. Federal Reserve Chairman Ben S. Bernanke’s signals that U.S. policy makers may reduce monetary stimulus pushed the Dollar Index to a three-year high last week.

The won stands out because of South Korea’s robust balance of payments, JPMorgan Chase & Co. analysts wrote in a July 12 report. They recommended the currency as a buy.

Citigroup Inc., the second-largest currency trader, said in a July 15 report that investors should hold “overweight” positions on the won. The firm still forecasts a decline to 1,163 per dollar by year-end, according to data compiled by Bloomberg.

Beyond Bernanke’s comments on paring stimulus, the won weakened in May and June on speculation that a slide in the yen would make it harder for South Korea’s exporters to compete with Japanese rivals. Finance Minister Hyun Oh Seok said yesterday in Moscow that global finance chiefs must work together to make sure the end of the Fed’s bond buying doesn’t weaken economic recovery in other nations. He reiterated that Japan must be careful to design its policies in a way that won’t trigger competitive devaluations.

Yen Recovers

The yen has recovered 3.4 percent since reaching a 4 1/2-year low of 103.74 per dollar on May 22, when Bernanke raised the prospect of a reduction in the U.S. central bank’s quantitative easing program.

“The won is undervalued, given the widening current-account surplus,” Wai Ho Leong, a Singapore-based economist at Barclays Plc, said in an interview. “Korean exports to key third markets such as China, Europe, the U.S. have not been dented by the weaker yen. Now, with the yen settling in a more predictable range, the won could continue to strengthen gradually.”

Ship Exports

More than 90 percent of vessels produced at South Korea’s shipyards are destined for overseas customers. Exports rose 12 percent last month from a year earlier, the first increase since June 2012. Deliveries will jump 50 percent in the second half of this year to $21.5 billion, according to the Korea Offshore & Shipbuilding Association.

“We expect to have more dollars in the second half as we deliver more drill ships and offshore projects this year,” Kim Ki Young, a spokesman at Ulsan, South Korea-based Hyundai Heavy Industries Co., the world’s biggest shipyard, said in an interview. “We will have to sell those dollars into won because we need money to work on other shipbuilding orders.”

Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. make up the list of the world’s three largest shipbuilders. Daewoo Shipbuilding said in an e-mailed response to Bloomberg that it also expects increased dollar receipts as deliveries come on stream. It announced two drillship contracts worth $1.7 billion this week.

Dollar’s Rise

The Dollar Index, which Intercontinental Exchange Inc. uses to monitor the greenback against the currencies of six major U.S. trading partners, jumped 2 percent in May on the prospect of the Fed paring stimulus measures. It climbed to 84.75 on July 9, the highest level since July 2010.

The index rose in the last two days after Bernanke told lawmakers this week that the central bank’s $85 billion of monthly bond purchases “could be reduced more quickly or expanded” depending on the pace of recovery in the U.S. The gauge has fallen 0.6 percent this month.

Until July, the won was also hurt as overseas investors pulled $6.2 billion from South Korean stocks over the last three months, the heaviest net sales since the third quarter of 2008, exchange data show.

The country is less vulnerable now to asset flight. Its short-term overseas debt slid 36 percent to $122.2 billion in the first quarter, after touching an all-time high of $189.6 billion in 2008, central bank data show. The ratio of foreign-exchange reserves to short-term liabilities has improved to more than 2.5, from 1.5 in 2008, according to Bank of America.

Hot Money

Tim Condon, the head of Asian research at ING Groep NV in Singapore, forecasts that the won will drop to 1,150 per dollar by year-end, while saying that “hot money” is likely to propel a short-term rally in the nation’s government bonds and stocks.

An upper-house election due July 21 in Japan, coupled with the prospect of the U.S. tapering its stimulus, could lead to a resurgent dollar and reverse the won’s rally, Condon said.

The Kospi Index of stocks has increased 5.7 percent since touching an 11-month low in June, when global funds sold $4.5 billion more South Korean stocks than they bought. Foreign ownership of won-denominated bonds rose in each of the last five months, official data show.

Central banks account for 41 percent of the overseas bond holdings, which is higher than other Asian debt markets and makes South Korea less vulnerable to capital outflows, Daniel Hui, the head of emerging Asia foreign-exchange strategy at JPMorgan in Singapore, wrote in a July 12 report.

‘Best Hedge’

The won is the “best hedge to balance out” the U.S. firm’s “very bearish” recommendation that investors bet on declines in the rupiah, Malaysian ringgit, Indian rupee and Chinese yuan, according to Hui.

Korean exports across all industries averaged $46 billion in the last six months, roughly in line with the past three years, according to trade ministry data. Electronics shipments totaled $81.1 billion, automobiles added up to $22.5 billion and ships accounted for $16.1 billion.

Growth in world trade, more than 90 percent of which is transported by sea, slowed to 2.7 percent last year from 6.2 percent in 2011, the World Bank said in a June report. The organization predicts an increase of 4 percent this year and 5 percent in 2014.

The outlook for faster economic expansion in Korea will “trigger resurgent interest in Korean assets, most notably in equities,” said Leong at Barclays, forecasting the won will strengthen to 1,100 per dollar by year-end. “The risks are tilted toward an even stronger currency as the growth outlook improves.”

Before it's here, it's on the Bloomberg Terminal.