Wednesday, May 24, 2006

Won- Dollar Insights

One major concern for U.S. firms linked to a Korean based company is the strong Won- weak Dollar issue. It's eroding the profitability of most of the major Korean conglomerates with huge overseas operations--Samsung, LG, and Hyundai-Kia.

One group who's work I trust in reporting on the Korean economy is the Korea Development Institute (KDI). I respect the experts at the KDI and value their insights. (In fact, I've met a number of the economists and academics from the institute. )

SEOUL, May 24 (Yonhap) - The South Korean Won's recent gain against the U.S. Dollar has been mainly driven by sound economic fundamentals in the economy, a state-run think tank said Wednesday.

Despite brewing concern that the local currency's gain may dent the trade balance, its impact on overseas demand may not be stronger than in previous times, the Korea Development Institute (KDI) said.

"The currency rate (dollar-won rate) fell comparatively fast, reflecting the speed of economic growth and corporate profitability," the state-run research institute said.

The South Korean economy, Asia's fourth-largest, has grown at an annualized rate of 6.2 percent since the second quarter of last year, higher than the corresponding rates in Japan and European countries.

Corporate profitability has also increased sharply since a financial meltdown hit the country in late 1997, it said.

The won has gained around 7 percent versus the greenback so far this year, hitting an eight and a half year peak at 927.3 on May 8.

The won's strength has trimmed the profitability of local exporters by undermining their price competitiveness in overseas markets.

The KDI estimated that a 10-percent rise of the won to the dollar would cut the ratio of corporate operating income to sales by 0.4 percentage point.

"Shipbuilders and semiconductor manufacturers will suffer the most," the research institute said. { I'd add car makers here, too.]

It urged the government to promote private and corporate spending to foster economic growth, while boosting corporate productivity to minimize the impact of the rising currency on local exporters.

So what's this mean?
Well on one level, it means the Korean economy's solid. On another level, it means profitability will suffer somer for those who export. The KDI suggests that exporters "boost productivity." That mean " work harder."

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