Japan's Currency Move Could Effect Won

If you are like me, you probably do not go more than a week without checking the exchange rate between Won and Dollars.  Here is a graph for the exchange rate over the last two years.

The crazy up and down spikes in the beginning was the start of the global recession.  Korea deliberately devalued its currency by nearly a third to protect itself.  But Korea and Asia in general pulled out of the recession pretty quickly.  The won was then doing fantastic in the spring time.  Then that boat sank and it shook the market.  People actually thought there might be war this time and the currency took a hit.

However, since the summer elections in Korea ended and the quiting down of the Cheonan sinking, the Won has been on the move again in the right direction.  Business Week wrote an article talking about the dynamics at play between Japan and Korea and their currency control policies.

Will Korea follow Japan's lead and weaken its currency? Speculation about Korean won intervention has circulated among currency traders in Seoul since Sept. 15, when Japan sold enough of its own currency to drive the yen down 2.5 percent in one day. "We think the Bank of Japan will intervene in the yen until it hits 88 per dollar," says Yun Se Min, a Seoul-based currency trader at Busan Bank. "This will provoke the Korean central bank to intervene." The yen is trading around 84 to the dollar: The cheaper it gets, the more affordable its exports will be, especially in the U.S.

It's a little hard to figure out why the Koreans expect an intervention by the Bank of Korea. True, at almost 1160 to the greenback today, the won is 27 percent stronger than at its weakest point in March of last year, when the global economy was in terrible shape. Compared to its strongest point in the fall of 2007, though, the won is still almost 30 percent weaker. Though the median estimate of currency strategists is for the won to strengthen another 9 percent through 2011, that would still leave it weaker than three years ago.

Meanwhile, Korea is thriving. Aided in part by a weak won, Korea's exports will probably increase 26 percent this year, according to the government. Investors have pushed the benchmark Kospi Index up 9 percent this year: Japan's Nikkei has dropped 9 percent.

Yet the Koreans are starting to worry. All those repatriated profits and portfolio fund dollars have pushed the won up over 3 percent in September, making it Asia's best performer. "The most critical factor is whether the won remains at the current level," says Cho Hwan Eik, president of the Seoul-based Korea Trade-Investment Promotion Agency. He adds that export growth may start to slow in the fourth quarter if the won gets much stronger. "We're not in a safe zone," he says. Lee Seung Woo, a consumer electronics analyst at Shingyoung Securities in Seoul, says that with demand for personal computers and televisions weak, a stronger won would be a further burden for Korean tech companies.

The won faces "the strongest appreciation pressures" in the region, according to a Sept. 13 report by Goldman Sachs (GS). If the won does keep strengthening—and if a weaker yen makes archrival Japan more competitive—pressure will mount on Seoul to act.

The bottom line: The Korean won has remained surprisingly weak for two years, giving Korean exporters an edge. Now it is strengthening.

Every country in the world wants to sell their products to the United States.  What will happen when the United States is no longer able to buy them?  The United States itself wants to devalue its currency in relation to the Chinese because of staggering trade deficits.  Unemployment remains high in the states and people cannot buy as much.  I think Korea and Japan should be reformulating their strategies.

Here's to hoping the Won stays strong!