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The World Price Index

Released: July 14, 2015

South Korean Won hits dollar undervaluation for first time in 2 years

  • South Korean Won moves to -3.2% undervaluation, down from high of 21% in 10 months.
  • Chinese Yuan maintains undervaluation at -14.8%.
  • Russian Rouble falls to -26.1% undervaluation as economy weakens.

South Korean Won slides to Dollar undervaluation
The latest set of World Price Index (WPI) data for July indicates that the South Korean Won fell from an overvaluation of 2.4% against the US dollar in June to an undervaluation of -3.2% measured in terms of Purchasing Power Parity (PPP). The change is likely to be a consequence of recent government policies to weaken the value of the currency to maintain export competitiveness.

The Won has been showing strength against the Japanese Yen and the Euro harming Korea’s exports which have fallen for six successive months. The WPI data shows that the Won has been overvalued against the US dollar since it was added to the list of tracked currencies and reached a peak of a 22% overvaluation a year ago. The Central Bank has lowered interest rates four times over the past twelve months and the overvaluation of the Won against the dollar in PPP terms began to ease back, but last week the government announced a series of measures that made it easier for domestic investors to buy overseas assets to stimulate the demand for foreign currencies.

The WPI data shows that the Korean government is finally having some success in its plans to push down the relative value of its currency. For example, in July while the market foreign exchange rate stood at one US$ to Won 1,133.25, the WPI rate was one US$ to Won 1,066.99 based on the real purchasing value of the South Korean currency. This indicates a downward swing in valuation in PPP terms against the dollar of 5.64% against the value in June.
 

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