Photographer: SeongJoon Cho/Bloomberg

Why the World-Beating Won Is Likely to Escape Intervention

Updated on
  • President Moon may prefer a stronger won to aid reform agenda
  • Trump’s demand for fairer trade terms may inhibit intervention

Won bears looking for the government to stop the currency strengthening may be in for a long wait.

Intervention may be deemed fruitless ahead of Bank of Korea’s first interest-rate increase since 2011, while President Moon Jae-in’s administration is seen as favoring a stronger currency, analysts said. This may explain the muted government reaction as the won surged to its strongest level since May 2015 last week.

Asia’s best-performing currency has jumped almost 11 percent this year against the U.S. dollar. That’s prompted almost daily jawboning from government officials. What’s missing is a joint effort by the finance ministry and the central bank, seen during February 2016 and July 2014 -- though with mixed effectiveness.

“The possibility is always there, but we expect the central bank to smooth at key technical levels rather than lean against the wind,’’ said Andy Ji, an Asian FX strategist at the Commonwealth Bank of Australia in Singapore. 

The won is the best-performing emerging-market currency this quarter, according to data compiled by Bloomberg. Here are four factors that may be holding backing sterner intervention efforts.

BOK Hiking

With 14 out of 19 economists surveyed as of Monday expecting the Bank of Korea to raise rates at its Nov. 30 policy meeting, intervention would be swimming against the tide. Far better to conserve foreign currency reserves till later.

“There’s something wrong when you say you’re going to hike, and then you start intervening against the currency,” said Mirza Baig, the head of Asia FX and interest-rate strategy at BNP Paribas SA. BOK seems to have scaled back its intervention in the market since early this year, which is partly why the won has climbed, he said.

Moon’s Agenda

A stronger won may well suit President Moon’s agenda. His administration has pledged to reduce inequality and bolster domestic consumption, while relying less on conglomerates and exports to drive the economy.

“The government wants to limit import prices from rising, boost domestic demand, strengthen purchasing power and help households,” said An Young-jin, an economist at SK Securities Co. “In order to do that, it will be best for them to keep the won strong.”

Yen Cross

The yen-won currency cross is important to South Korea given the competition between the two economies in the exports of high-value products such as phones, ships and cars. The government may be anticipating the yen will strengthen against the dollar, offsetting some of the won’s advance against Japan’s currency.

While any type of intervention should be avoided, the Korean authorities “may have no reason to intervene at the moment in the face of the yen’s uptrend,” said Jeong Wonil, an economist at Yuanta Securities Co. in Seoul. “Yen’s strength means better export competitiveness for Korea.”

The yen has advanced for three consecutive weeks against the greenback.

Trump’s Watch

The final barrier is U.S. President Donald Trump’s demand for better trade terms. South Korea, which is on the Treasury watch list of nations deemed at risk of engaging in currency manipulation, in October agreed to amend a U.S. free trade deal.

“The U.S. is very wary these days, and this makes it difficult for the central bank to buy dollars as much as they want to,” said Jeon Seungji, a currency analyst at Samsung Futures Inc. in Seoul. 

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