Kim Jin-wook, Korea chief economist at Citi Research, delivers a presentation during a seminar on the outlook for the won-dollar exchange rate at a forum hosted by the Federation of Korean Industries in Seoul on Monday. (FKI) South Korea’s currency is forecast to strengthen modestly toward 1,450 won per dollar in the second half of the year, though the exchange rate is expected to remain relatively high and volatility is likely to stay elevated, according to experts on Monday.Speaking at a seminar hosted by the Federation of Korean Industries, economists said that robust export performance and a record current-account surplus should provide support for the won. However, persistent dollar demand from overseas investment and foreign investors’ trading activities could limit gains."The won-dollar exchange rate is likely to hover around 1,480 won over the next three months, before dropping to around 1,450 won within six to 12 months," said Kim Jin-wook, Korea chief economist at Citi Research.He cited stronger semiconductor exports, growing domestic stock investments by Korean investors and the likelihood of sustained current-account surpluses as factors that should support the won.The won was trading near 1,540 won per dollar Monday after recently touching its weakest level against the greenback in nearly three decades since the 1997-98 Asian financial crisis.Kim identified that recent surges in the won-dollar exchange rate were largely driven by foreign investors’ portfolio rebalancing and profit-taking activities.He noted that foreign investors' holdings in Korean assets have almost doubled, surging from roughly $1 trillion last year to $1.9 trillion by the end of May."Foreign investors' exposure to Korea has roughly doubled, and their continued net selling in the spot market has put downward pressure on the won," Kim said. "Even when they are not selling stocks, currency hedging activity is estimated to have contributed to pushing up the won-dollar exchange rate."Kim added that uncertainty surrounding foreign investors' capital flows remains a major risks for the currency."Nobody knows how long foreign investment funds will continue to flow out of Korea," Kim said. "As global markets repeatedly shift between risk-on and risk-off modes, it will be difficult to avoid elevated volatility in the won-dollar exchange rate."Over the longer term, Kim expects the won-dollar exchange rate to remain around 1,400 per dollar over the next three to five years.Other experts echoed the concerns, saying one of the reason the won has failed to strengthen despite record exports is that Korean companies are increasingly keeping dollar earnings overseas rather than repatriating them."The Bank of Korea expects the current-account surplus to more than double this year, and some believe it could be even higher," commented Jeong Young-sik, senior research fellow at the Korea Institute for International Economic Policy. "But the reason this is not having a major impact on the exchange rate is that not all of that money is flowing back into Korea."This is because most of the dollar revenues are being used to fund investments abroad, particularly in the US, he said, estimating that Korean companies hold more than $100 billion in retained earnings overseas."Many companies are holding dollars as a precautionary asset or using them for overseas investment, creating a structural source of pressure on the won," said Lee Tae-kyu, senior research fellow at the Korea Economic Research Institute, echoing Jeong’s view.The discussion also featured calls for tighter monetary policy to help stabilize the currency."The current exchange-rate level should not be left unchecked," Joo Won, head of economic research division at Hyundai Research Institute, said. "While the 1,400 won range may be tolerated as the new normal, current levels are difficult to accept. A preemptive rate hike would be one of the few effective options.""I think the Bank of Korea could raise interest rates this time, possibly from July," said Hur Joon-young, economic professor at Sogang University. "That could help narrow the interest-rate gap with the United States and ease some pressure on the exchange rate."Citi’s Kim also said he expects the Bank of Korea to begin raising interest rates as early as next month and projected up to four rate hikes through next year."Acting as early as possible would help reduce broader economic risks and stabilize the won-dollar exchange rate."