USD-KRW rate heading to a 16-month low

But here's why their woes are ''excessive''.

According to DBS, The USD/KRW rate is now approaching a 16 month low of 1060. Some are worried about the adverse impact of a strong KRW on export competitiveness. The worries are excessive, in the firm's view.

First, the won remains undervalued, as its appreciation came after the massive depreciation during the 2008 global financial crisis. The Big Mac index shows that the won was still undervalued by -26% versus the USD as of Dec12.

Second, the effective exchange rate of KRW (NEER or REER) should be rising more slowly than the bilateral rate versus the USD, as the emerging Asian currencies are now appreciating in a group.

Third, the Korean exporters have experiences to manage the costs of won appreciation. In prior to the global financial crisis in 2002-2007 when the won appreciated at a pace of 5% on average per year, Korean exporters successfully maintained global market share and corporate profitability via technology advancement and productivity gains.

Here's more from DBS:

On the other hand, don’t forget that a stronger currency can benefit the domestic economy via the import channel. A stronger won strengthens domestic consumers’ purchasing power and reduces the production costs of domestic-oriented enterprises.

This is in line with the policy priority of Korea’s upcoming new government – improving consumer welfare and helping SMEs in the domestic sector.

In addition, the recent KRW appreciation reflects the improvement in Korea’s economic fundamentals – recovering growth, slowing inflation, a strong current account and falling external debt.

Foreign net investment in Korean equities and bonds both surged in Dec12 (KRW 3.9trn and 2.0trn respectively), far above the monthly averages in Jan-Nov12 (KRW 1.3trn, 0.5trn).

The current account surplus stayed above USD 5bn since Sep12. By contrast, the short-term borrowings under “other investment” of the BOP declined persistently in the past five months, alleviating concerns about speculative capital inflows.

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