Korean Won Likely to Strengthen by 10% in 2010

If the domestic currency appreciates 10 percent against the greenback, the country's growth rates of exports and national outputs are expected to drop by 2.12 percentage points and 1.13 percentage points, respectively.

The hitch is that the Korean won is highly likely to strengthen that much against the dollar in the not-so-distant future, according to the Samsung Economic Research Institute (SERI), Wednesday.

"The won is expected to remain strong throughout 2010 as the supply of dollars will outstrip demand here thanks to account surpluses," SERI senior researcher Park Hyun-soo said.

"In addition, the dollar has weakened in the aftermath of the financial crisis and the trend will continue next year. The won-dollar rate is expected to dip 10 percent in 2010."

The won-dollar exchange rate surged to approach the 1,600-won mark in March at the peak of the economic turmoil but has moved below the 1,200-won level of late.

SERI, a private think tank affiliated with the Samsung Group, predicts that the rate will fall around 10 percent to below 1,100 won late next year, which would weigh heavily on Korea.

A strong won would be bad for the country's exporters such as Samsung Electronics and Hyundai Motor as the prices of their dollar-denominated products would tend to go up.

SERI points out that the weak dollar will cause the values of raw materials to rise, negating the conventional wisdom.

"When the dollar depreciates, prices of dollar-denominated products should head down by definition. But next year, the weak dollar is expected to attract both real and speculative demand for minerals and crude oil, which will overwhelm the price effects," Park said.

"Accordingly, the values of raw materials are expected to rise. This would negatively affect Korea - a country that does not produce oil and also lacks other natural resources."

However, SERI said that a weak dollar would not be entirely bad.

"The higher prices of raw materials would boost the economy of producers of oil and other materials. Then, they would have the luxury of resuming construction projects, which were suspended due to the recession," Park said.

"It would help our builders and some exporters in terms of global competitiveness. The weak dollar may prove to be a blessing in disguise for some Korean companies."