The real value of the South Korean won compared to other major currencies fell for a fifth straight month in April, hitting its lowest in 19 months amid escalating trade tensions between the U.S. and China, the two biggest trading partners of export-reliant Korea.
According to real effective exchange rate (REER) indices compiled by the Bank for International Settlements (BIS), the exchange rate for the Korean won stood at 110.2 points last month, down 0.6 percent from a month ago. The index – which is benchmarked at 100 in 2010 – fell to its lowest since 109.64 points in September 2017.
REER is the weighted average of a country’s currency compared to a basket of other major currencies after adjusting inflation differentials with other trading partners. The weighted value of China’s yuan is the largest, accounting for one third because the world’s second biggest economy is Korea’s biggest trading partner. A reading above 100 means a country’s exchange rate is valued higher than the benchmark year in 2010 and vice versa for numbers below.
In an annual report released recently by the International Monetary Fund (IMF), the annual average of the real value of the Korean won last year rose 1 percent from a year earlier, gradually rising from 2013. The value of the Korean won, however, has reversed its trend after the end of last year. The REER of the Korean won has been on a fall for a fifth consecutive month since December after hitting 113.99 in November.
The Korean won is projected to remain undervalued compared to its peers as its value has weakened against the currencies of major trading partners including the U.S. dollar, euro, and yen in May. The Korean won closed at 1,195.7 won against the U.S. dollar as of Friday, falling 2.3 percent this month.
The weakening of the Korean won is largely due to strong U.S. dollar trend amid increasing risk aversion, rising uncertainties from the escalating U.S.-China trade conflict, and deteriorating local economic conditions such as sluggish exports.
A fall in the value of the Korean won could bode well for exporters because Korean products would have greater price competitiveness against products from other countries. Industry watchers, however, noted that the drop in the real value of Korean won would lead to limited positive impact on the country’s exports amid rising economic uncertainties at home and abroad.
The Korea Institute for International Economic Policy also noted that given a rise in intermediary goods’ imports and Korean companies’ overseas operations, the lower value of Korean won would have limited impact in bolstering exports. Rather, growing uncertainties from the escalating trade war between the U.S. and China pose a greater risk to Korea’s exports, it said.
By Chung Joo-won and Lee Eun-joo
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