GO
Loading...

Korean won undervalued by as much as 8% - IMF

Bloomberg | Bloomberg | Getty Images

South Korea came under fresh pressure on Friday to let the won rise faster, when the International Monetary Fund said it was carrying an abnormally big current account surplus and that more dollar purchases would do more harm than good.

The IMF said in a report based on its late 2013 annual policy review that the won was estimated to be as much as 8 percent undervalued, while saying South Korea appeared to have been intervening actively to resist the currency's appreciation.

The U.S. Treasury Department also called on South Korea in a scheduled report early this week to limit foreign exchange intervention to exceptional circumstances and not use regulatory measures to curb appreciation pressures.

Is this currency the 'best on the planet?'

"Staff, therefore, continue to assess that the exchange rate remains moderately undervalued in the range of 2-8 percent, with the upper end of the range seeming more plausible in light of the recent widening of the current account surplus," the IMF said said.

The won has gained 1.8 percent against the dollar so far this year and was trading close to a near six-year high set last week.

The IMF said South Korea's current account surplus was estimated to be around 3-4 percent more than the norm. South Korea's current account surplus shot up to 6.1 percent of annual gross domestic product in 2013 from 4.2 percent in 2012.

Read MoreDeveloping Asia set for steady growth in 2014: ADB

"Over the medium term, greater exchange rate appreciation would encourage reallocation of resources to the non-tradables sector, thereby further supporting rebalancing," the IMF said, adding further dollar-buying intervention is also costly.

South Korea's economy, the fourth-largest in Asia, relies heavily on exports for growth and the country has repeatedly denied it was intervening in the currency market with the aim of keeping the won cheaper than the fair value.

"(South Korean authorities) disagreed with staff's assessment that the won is moderately undervalued, noting its appreciation since 2012," the IMF also said in the report. "They stressed that smoothing operations are restricted to alleviating excessive exchange rate volatility in the face of market herding."

The report was published based on the IMF's annual policy consultations with South Korea held in late 2013 and on a staff report prepared early this year, it said.

Read More Is this a gamechanger for Asia's bond markets?

It added inflation in South Korea was expected to return to the country's target, which is set by the central bank at between 2.5 percent and 3.5 percent. Inflation has stayed below the lower end of the target for months.

Symbol
Price
 
Change
%Change
USD/KRW
---

Contact World Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More