Central Bank Will Prop Up Won

The Bank of Korea said Thursday that if necessary, it will intervene directly in the currency market by using the nation's foreign exchange reserves in order to prop up the won's value against the U.S. dollar.

"This week the yen has been regaining its strength, rising to the 125 level against the dollar, but the won continued to fall abnormally low against the dollar," said Lee Jae-wook, an assistant deputy governor at the central bank, during a meeting with the press.

The government would use its foreign reserves to sell dollars and buy won on the foreign exchange market in a bid to check the Korean currency's slide.

"If the won continues to go down, import prices will climb, leading to a possibility of mounting inflationary pressure in the country," Mr. Lee said. "This would give rise to a hike in interest rates on money and in return, stock prices will be heading toward a steep fall."

The assistant deputy governor said that the country's foreign reserve holdings reached $94.4 billion at the end of March. "It is enough to deal with external shocks blown on the market," he said.

Foreign exchange authorities said that the won's sharp fall is mainly due to speculative trading on the market and oversensitivity shown by some foreign exchange traders.

The Finance and Economy Ministry expressed the view that regaining the won's strength is the most pressing issue to be resolved in order to stabilize the nation's financial markets.

"Since foreign exchange rates, stock prices and interest rates are all related to each other, we will actively seek measures to help the won regain its strength to keep the country from being locked in a vicious circle," said Kim Yong-duk at the Finance Ministry. He warned that those who do not believe in the government's determination will be in trouble, since "the foreign exchange rate can fall as fast as it rises."

Market experts suggested that the central bank's prescription may prove to be effective in conjunction with the Japanese government's announcement expected Friday of measures boost that country's sagging economy.

But if the yen value sinks back, then the won is likely to follow suit. "Be-cause of the yen, what the central bank can do is very limited," said a senior official at Deutsche Bank. "The central bank won't be able to use foreign re-serves so easily," he said.

by Kim Won-bae