You may often hear in whispers – the Korean Won seems to be so undervalued. But why is that? Why is the Won so cheap?
The perceived inexpensive nature of Korean Won mostly comes from its unit value being low compared to other currencies. There are also underlying reasons including South Korea’s export-oriented economic policy, its steady economic growth, and its strategic devaluation to maintain competitive export prices.
Ready to delve deeper? Stick around. This condensed guide will help you uncover why the Korean Won appears to be inexpensive on the global market.
What is Won?
Won is the official currency of South Korea. The currency code for the won is KRW and the symbol is ₩. Banknotes come in denominations of ₩1000, ₩5000, ₩10000, and ₩50000, while coins are available in ₩1, ₩5, ₩10, ₩50, ₩100, or ₩500 denominations.
The value of the South Korean won is determined by market forces related to international trade, inflation, and geopolitical risks. Various factors such as the nation’s economic health, geopolitical stability, trade balances, inflation rates, and several other economic factors come into play when determining the value of the Won.
An Overview of the South Korean Currency
The South Korean won is divided into 100 jeon, but in reality, jeon is no longer used for everyday transactions. The Bank of Korea is responsible for the release and circulation of all currency in South Korea. But, the day-to-day transactional currency for most people in South Korea remains the won.
The average exchange rate for the South Korean won against the US dollar has been fluctuating over the years. However, you can often find that the won seems relatively ‘cheap’ when compared to currencies such as the USD or Euro. This apparent ‘cheapness’ is not a reflection of the strength or weakness of the South Korea’s economy but is due to the difference in the value of the currencies.
The Historical Background of Won
During the period of the Korean Empire in the early 20th century, Korea used the Yuk, Hwan, and then the Won as its currency. However, these were replaced by the Yen during the Japanese rule from 1910 to 1945. After Korea’s liberation in 1945, the won was reintroduced, replacing the yen at par.
In the early 1950s, the Korean War sparked inflation, and by 1953, the won was replaced by the hwan. However, by 1962, inflation had gotten so bad that the hwan was replaced by a second Korean won at a rate of 10 hwan = 1 won.
Today, the South Korean won is a floating currency, meaning its value changes on a moment-to-moment basis as traders buy and sell it on foreign exchange markets. Despite its low comparative value, it remains the daily tool for monetary transactions for the people of South Korea.
Understanding Currency Valuation
Currencies tend to represent the economic health of a country and its future outlook. To understand why the Korean Won is so cheap in comparison to other currencies, it is important to understand the basic principles that govern currency valuation.
Understanding Currency Valuation
Several factors determine the value of a nation’s currency such as economic stability, inflation rates, foreign trade, and geopolitical conditions. These elements help establish the supply and demand for a currency and, subsequently, its value in the global market.
The Role of the Economy
Generally, a strong and stable economy leads to a strong currency. This is mainly because a strong economy attracts foreign investors. When foreign investors invest, they convert their currency into the currency of the country they’re investing in. This increases demand for that currency and drills up its value. Conversely, a weakening economy often results in investors pulling their assets, leading to a decreased demand for that currency, subsequently lowering its value.
Inflation and Monetary Policy
Inflation also has a significant impact on currency evaluation. Lower inflation rates are typically coupled with rising currency value because the purchasing power of the currency remains stable in the face of inflation. Countries with higher inflation typically see depreciation in their currency and therefore a rise in the prices of goods and services.
The monetary policy enacted by the country’s central bank also plays a crucial role. A prudent monetary policy that ensures financial stability contributes positively to the value of a currency. For instance, higher interest rates can cause an increase in the value of a currency, as they deliver better returns on assets held in that particular currency, which in turn increases the demand for that currency.
Market Demand and Supply of Currency
The foreign exchange market, which is largely governed by supply and demand, is where currencies are traded. If the demand for a particular currency is high, its value will increase. This can occur if a country’s goods and services, investment opportunities, or interest rates are seen as attractive.
On the other hand, if a country is seen as economically or politically unstable, the demand for its currency will diminish, investors will sell their holdings, and the value of the currency will decrease. Essentially, the perception of the market plays a significant role in determining the value of a currency.
The Korean Won being ‘cheap’ is therefore a complex issue. It doesn’t necessarily mean that South Korea’s economy is weak or performing poorly, as the value of a currency is not a true reflection of a nation’s economic strength or wealth. There are many factors at play and they all interact in various, complex ways to determine a currency’s value.
Why is the Won Cheap Compared to Other Currencies?
Understanding why the South Korean won is cheaper compared to other currencies requires a deep dive into its economic infrastructure, and understanding the various factors that determine the exchange rate. These primarily include South Korea’s economic structure and the influence of international trade.
The Influence of South Korea’s Economic Structure
South Korea is typically known as an emerging industrialized economy, which tends to have a lower currency valuation. It’s essential to understand that a lower currency price doesn’t always signify a weaker economy. It’s more related to factors such as inflation rates, interest rates, and public debt. In South Korea’s case, inflation rates have remained relatively stable, while public debt is significantly lower compared to many other developed economies. However, the country does maintain lower interest rates than many Western economies to stimulate borrowing and investment, thus resulting in a lower currency value.
The Impact of International Trade
International trade is another major factor influencing the value of the won. As we shall see, South Korea’s export-oriented economy and foreign exchange management significantly impact the won’s value.
South Korea’s Export-Oriented Economy
South Korea possesses a robust export-oriented economy, benefitted by exporting goods cheaply to other countries. A lower currency value accomplishes this by making their products more economical to overseas buyers. South Korea is among the top 10 global exporters, with key exports including vehicles, semiconductors, and electronics.
Foreign Exchange Management
Exchange rate policy also plays a role in the valuation of the won. The Bank of Korea, like many other central banks, impact the exchange rate through its monetary policy. By buying and selling its own currency in the foreign exchange market, it can influence the won’s relative price. This policy allows domestic producers to remain competitive in global marketplaces, further boosting South Korea’s export industry.
Other Factors Affecting the Won’s Value
The value of the Korean Won, like any other currency, is influenced by various factors, some of them nationally specific, others related to global geopolitical dynamics. Here, we delve into some of these critical elements and try to comprehend why the Korean Won is cheap.
Political Tensions and Geopolitical Risks
Political stability plays a critical part in influencing a country’s currency value. In the case of South Korea, its volatile relationship with its northern counterpart constantly poses geopolitical risks and uncertainties.
For instance, whenever North Korea conducts a missile test or when the relations between both Koreas deteriorate, it negatively impacts the value of the Won. This instability and unpredictability lead investors to shy away from the currency, making it less demanded and hence less valuable.
The Role of Technological Advancements
South Korea has made significant strides in technology, with tech giants like Samsung and LG, making it a hotspot for large scale foreign investments. However, these advancements have a paradoxical effect on the value of the Won.
While technological advancements attract foreign investments, increasing demand for the Won, South Korea’s substantial reliance on imports for manufacturing these tech products leads to a higher demand for foreign currencies. It escalates their conversion rates compared to the Korean Won, thus, cheapening the Won’s value.
Market Psychology and Speculation
One of the trickle-down effects of events like political tensions or technological progress is their impact on the people and the market’s psychology. In the world of finance and economics, perception and speculation can drive the market.
For example, ongoing political tensions and uncertainties can create hesitance and doubt among traders. This lead can often lead to the sale of the currency, hence increasing its supply in the market, and ultimately, its value drops. Conversely, positive technological advancements could lead to a surge in the value of the Won if traders perceive that these will bolster South Korea’s economy.
Pros and Cons of a Cheap Currency
The value of a currency plays a significant role in the economic development of the nation. As such, the cheap Korean Won isn’t without its advantages and disadvantages. Let’s take a closer look at these.
Positive Effects on Trade and Economy
The cheaper currency can be beneficial for several aspects of the economy, notably in trade and tourism.
A cheaper Won can make Korean goods cheaper and more attractive on the international market. This can drive up exports, which in turn supports industry and jobs. When foreign customers pay in their relatively stronger home currency, Korean companies convert that back into more Won, effectively increasing their revenues.
|Exports (in billion USD)
Note: The data in the table above to demonstrate the performance of Korean exports over the years.
Cheaper currency also makes traveling to Korea more attractive for tourists, which is another major driver of national revenue. The lower exchange rate for Won means that visitors from countries with stronger currencies can buy more with their money when visiting Korea.
Negative Implications of Cheap Currency
While a weaker Won boosts exports and tourism, it does present some significant challenges as well.
Challenges for Importers
A cheap won can make importing goods into Korea more expensive, which is bad news for businesses that rely heavily on foreign products or raw materials. The increased costs of imports can subsequently be passed down to consumers in the form of higher prices.
Another risk associated with a weaker currency is inflation. If the cost of importing goods increases, this can lead to an overall increase in prices, which diminishes purchasing power and can drive up inflation. Too much inflation can ultimately be detrimental to an economy, as it creates uncertainty and can discourage spending and investment.
|Inflation Rate (%)
Note: The data in the table above to demonstrate the inflation rate in Korea over the years.
The Future of the Won: An Analysis
The South Korean Won, despite being the currency of Asia’s fourth-largest economy, is surprisingly cheap relative to many other global currencies. As of November 2021, one US Dollar can be traded for approximately 1,180 South Korean Won. This difference in value is not necessarily a reflection of the strength or health of an economy but rather, it’s due to a multitude of factors, which will be further discussed.
Economic Forecasts and Currency Predictions
To analyze the future prospects of the Won, it’s crucial to take note of economic forecasts and currency predictions. Most prevalent are inflation rates, interest rates, and the nation’s overall economic health.
As per reports from the Bank of Korea, the inflation rate for 2021 is forecasted to be 2.1%, returning to the central bank’s target range following a drop last year due to the Covid-19 pandemic. This could potentially influence the exchange rate, affecting the value of the Won.
South Korea’s economic policy decisions also play a key role in currency predictions. The government’s implementation of policies favoring economic growth could lead to increased trust in the Won, hence impacting exchange rates.
Policy Changes and their Potential Effects
South Korea’s economic policies, particularly those related to trade, have significant effects on the value of the Won. For instance, if the Korean government decided to reduce trade barriers, it could lead to increased foreign investment, causing the value of the Won to rise.
Furthermore, currency-specific policies, such as those that impact interest rates, also play a large role. For instance, if the Bank of Korea were to raise interest rates, it would likely attract foreign investors, potentially strengthening the Won.
The South Korean government’s approach to managing its currency’s volatility – through interventions in the domestic foreign exchange market – is also a crucial factor. It’s worth noting that these interventions can affect the perceived value of the Won, potentially making it appear cheaper or more expensive relative to other currencies.
Overall, a multitude of factors influence the value of the Won, making it a complex and constantly fluctuating economic element.