[EDITORIALS]Was intervention necessary?It has been revealed that the government intervened in the foreign exchange derivative market in the second half of last year to keep the value of the Korean won low. It was also revealed that the intervention caused considerable financial loss.
The government is emphasizing that it had no choice. At that time, with the U.S. dollar weakening and with Korea running a huge current account surplus, the market expected the local currency to appreciate against the American currency. If the Korean won had strengthened, it would have caused a slowdown of exports; with domestic demand remaining sluggish, that would have been a serious blow to the Korean economy. Without the intervention, the U.S. dollar would have dropped to around 1,000 won ($ 0.87) against the won, sapping the nation’s export competitiveness, analysts said. So, there are rationalizations for the government’s move.
Even so, the government’s method and degree of intervention into the market was excessive. A bigger effect could have been realized at lower cost through an intervention in the non-deliverable forward market than in the foreign exchange spot market. But, if it was disclosed that the government had intervened in the derivative market, that market would have become uncontrollable. If the government’s intervention to prevent a sharp fluctuation in the foreign exchange rates had become excessive, it could have brought about a sharper fluctuation in the rates.
What needs to be checked is whether the government intervened in the foreign exchange market to boost the domestic economy with an eye toward political factors such as the National Assembly election. Interventions in foreign exchange markets to reinforce export competitiveness can be accompanied by negative factors such as rises in import prices and weakening of domestic companies’ competiveness.
The government’s moves to stabilize the market should be minimized: reducing foreign exchange reserves to maintain the local currency’s value should not be repeated. The government should expand the domestic foreign exchange market, so that the speculative non-deliverable forward market no longer sways the won’s value. For that, the government should consider lifting regulations, such as opening the foreign exchange spot market completely.