S Korea Balances Worries Over Won With Pressure To Keep US Happy

Roger Blitz

South Korea’s won was the best performing emerging market currency last year, rising nearly 13 per cent, and further gains seem set to follow on the back of thawing tensions with North Korea.

But the country faces a tricky balancing act still, keeping Washington happy in its talks with its neighbour at the same time as negotiating a new trade deal with the US and trying to avoid falling foul of the US Treasury over its currency strategy. The won’s outlook appears buoyant on the back of a powering economy, a healthy trade surplus, strong equity inflows and the Bank of Korea starting out on the road to tighter monetary policy. But a fast-appreciating currency poses a threat to its exports. Samsung warned about the currency impact on this year’s earnings and carmakers fear the loss of sales in the US. Cue some BoK currency jawboning this week, alongside rumours of actual intervention, which promptly pulled the won lower.

Seoul must know this is a risky strategy, coming as trade talks get under way to renegotiate what the US president has called a “horrible deal”. South Korea remains on the US Treasury’s list of countries it monitors for possibly currency manipulation, so the BoK is “playing a bit with fire”, says Sacha Tihanyi of TD Securities. “But they are trying to swim upstream if they are against currency strength. Add to that the US political element, and you have a very challenging environment.”

Other Asian countries will watch developments with more than passing interest. In a dollar-bearish market, most of their currencies are also likely to follow the won higher. Thailand has sounded the alarm over the baht’s appreciating value and Commerzbank wonders if more Asian central banks will follow suit by talking down their currencies if the weak dollar trend continues.

But if tensions are indeed easing on the Korean peninsula, then investors will find yet another excuse to push the won higher, even if the currency remained fairly resilient during the sabre-rattling of 2017.

So South Korea may have to suck up currency strength. But with its private sector so far enjoying the global upswing as much as any, irrespective of this, then the pain of a further rise in the won should be tolerable.

>roger.blitz@ft.com

Source : https://www.ft.com/content/9da76dba-f53b-11e7-88f7-5465a6ce1a00

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