The Korean Government took steps to try to reduce the rising value of the Korean Won this week. Banks will be limited in how much they can hedge on later purchases of currency. The move is designed to slow the flow of capital into the region. The news will likely have little effect on the won as most analysts believe the currency to be undervalued relative to other Asian nations’ currency.
Still, Korea is in a position that many believe in undesirable. A higher valued won is bad for exporting companies, which is the heart and soul of the Korean economy. Less won to the dollar means that Korean companies bring home less money for each product sold overseas.
To put things in a different perspective, consider where the Won was back in January of 2012. The Won is currently 6% or so higher in value than it was back then. That means that Korean exporters must manufacture and export another 6% in volume just to make the same money they were making in January. Given the world economy, particularly in Europe, that’s a tough nut to crack.
Additionally, with the Won stronger than the Japanese yen, comparable products from Japan appear cheaper to overseas consumers thus further weakening Korea’s global position.
Meanwhile, Korea’s number one trading partner, China, is asking for more investment from the peninsula. And why not? Since the Chinese currency, the Yuan, is not controlled by the free market and instead floats in a narrow band relative to the US dollar, any rise in the won means the Chinese get cheaper products as well.
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