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Time to take intervention for S. Korea`s strong currency

Time to take intervention for S. Korea`s strong currency

Posted July. 04, 2014 07:05,   


The South Korean won keeps sharp advancing against the U.S. dollar in the foreign currency exchange market. The local currency closed at 1,009 won against the greenback on Tuesday, and quoted at 1,008 on Wednesday. Korean won has breached the 1,010 mark hitting a 6-year high. The Ministry of Strategy and Finance and the Bank of Korea made a verbal intervention saying “there is one-sided herd behavior in the foreign exchange market,” but it was too weak to stop rising of Korean won.

The recent advancement of Korean won is attributed to surpluses in the country’s current account and trade, which resulted in record-high foreign exchange reserves. Such trend pushes up demands for Korean won. The Asia’s fourth largest economy has been enjoying the current account surplus for the last 27 months and its foreign currency reserves reached 366.6 billion U.S. dollars marking the 12th straight record-breaking month. Another contributing factor is increasing foreign purchases of Korean shares and bonds due to the ultra-low interest rate policies in other advanced countries including the U.S. and Japan. If the current trend continues, the won-dollar rate may break the 1,000 won barrier, forecasting that the era of ‘3 digit won-dollar exchange rate’ is about to loom.

Whether it is strong or weak, fluctuation of Korean won value comes with light and shadow. Rising Korean won lowers prices of imported goods, which contributes to price stabilization in general and increases the purchasing power of Korean won. On the contrary, advancing Korean won puts exporting businesses in trouble, hurting their price competitiveness due to currency fluctuation. Rapidly strengthening won has been cutting profitability of local exporting companies, especially small and medium-sized exporters. Weak yen pushes up price competitiveness of Japanese businesses, major competitors of Korean exporters in the global market, increasing burdens of Korean counterparts. If Korean won keeps rising, it may bring about negative impact to the international balance of payments and other macro-economic index.

Even though it is inevitable to have strong Korean won for a certain period due to internal and external circumstances, it is desirable to control the speed at least. It may be hard for the government or the central bank to directly intervene in the foreign currency market and regulate the currency rates. But it is highly desired to put a break on too rapid rise of Korean won through other methods.

Accumulation of foreign exchange reserves is not a silver bullet. External investment needs to be expanded through Korea Investment Corporation or other options to mitigate appreciation of Korean won driven by surging foreign currency reserves. Activation of domestic market and increase of imports may be helpful to revive the domestic economy and slow down the appreciation of Korean won. Korea’s benchmark interest rate is 2.5 percent a year, seemingly not that high, but it is relatively high compared to the interest rates close to ‘zero’ in other advanced countries. Bank of Korea is still negative about interest rate cut, but now is the right time to reconsider it. Besides the government’s countermeasures, export-driven local companies need to make further efforts by enhancing their quality competitiveness, innovating the management and pioneering new markets in preparation for 3 digit won-dollar exchange rate.