[FOUNTAIN]Exchange rate mysteries

The exchange rate should be a suitable indicator of the rise and fall of a nation. The exchange rate has been called a comprehensive performance result of a country's economy. The decline of the U.S. economy led to a weak dollar, which lasted for a while after the 1970s. During the same period, a strong Japanese yen and an equally strong deutsche mark were signs that Japan and West Germany were turning into economic powers.

Before that, in the early 20th century, an unexpected explosion of Britain's trade deficit resulted in a huge outflow of British gold. As the British economy took a downturn, the British government could not secure enough gold needed for international transactions. The exchange rate determination system established in the 19th century, when the gold standard system prevailed and the basis for transactions and settlements was gold, started breaking down. With the sudden outbreak of events like World War I and the Great Depression, the gold standard system stopped functioning completely. Then, each country vied with one another by devaluing their currencies to increase exports, and this led to forming economic blocs, one of the reasons for the start of World War II.

The most memorable exchange rate crisis was the Nixon Shock that ended the exchange of the dollar into gold and gold into the dollar, in 1971. In the 1960s, a mounting U.S. trade deficit led to an enormous outflow of dollars outside the United States, which nearly led to national bankruptcy. After the Nixon Shock, the United States fell and Japan rose, which was reflected in the trend of a weak dollar and a strong yen and mark.

Recent discord among nations about exchange rates seems serious. Allowing a weakening of the yen by the Japanese government, which could not overcome a 10-year recession, has become a target of criticism. As the yen to dollar rate sharply rose to 130, the Chinese government showed an unpleasant reaction and Korea's foreign exchange authorities seemed concerned. Reactions of Thailand, Indonesia and Malaysia were not much different. There is growing speculation that the invisible hand of the United States played a role in Japan's weakening yen. This speculation is based on a view that political and diplomatic strategies are skillfully mixed with an exchange rate policy. The exchange rate is not just determined by the market, but behind an exchange rate lie powerful and diplomatic artifices. The will of the Japanese leaders is tested daily due to the weakened state of the yen. Meanwhile, the Korean won interacts with the Japanese currency.

The writer is an editorial writer of the JoongAng Ilbo.

by Choi Chul-joo