[VIEWPOINT]Won’s rise no sudden surpriseThe dollar has been moving in mysterious ways lately. The Korean currency has appreciated by 40 won per dollar in the last three weeks, causing alarm at companies relying on exports.
The problem is that this is something we more or less brought upon ourselves. Last year, the dollar was weak against the other major currencies, causing the yen to rise by 11 percent and the euro by 20 percent against the U.S. currency.
Meanwhile, the won lost a half-percent of its value against the dollar, indicating how aggressively the authorities intervened in the foreign exchange market. Market observers generally believed that 1,140 won per dollar is the acceptable exchange rate. In the course of maintaining that rate, we saw a loss of 1.8 trillion won in the non-deliverable forward market and derivatives.
Granted, the measures were designed to maintain exports, currently the only driving force behind our economy. But that’s where our problems began. In our effort to promote exports by maintaining the desirable exchange rate when exports were already strong, we have landed ourselves in a position where the effects of the devaluation will be greater when exports slow down as predicted.
That is like a family that all caught colds because its members overheated the house and took off their clothes, only to be unprepared for the cold weather when they ran out of heating fuel.
Something similar happened in 1997. Officials were intervening in the foreign currency market, even using forward exchanges, after setting 1,000 won per dollar as their line in the sand. But the result was a disaster. With a growing shortage of dollars and a sudden flood of forward exchange settlements to pay, the country plunged into a vicious circle of dollar shortages and a falling won. As the shortage worsened, officials finally abandoned their intervention in the foreign currency market. Soon after, Korea was in crisis and had to ask the International Monetary Fund for assistance.
At the time the lowest acceptable exchange rate was considered 1,000 won per dollar. Currently it is 1,140 won per dollar. The objective of the government intervention at the time was to stop a devaluation. Now it is to stop a revaluation.
One thing has not changed though; officials used derivatives as means to intervene and their overt enthusiasm made them run out of ammunition too soon and ultimately caused the fluctuations to become even more volatile.
In 2003, the United States’ current account deficit was $530.7 billion, about 5 percent of its gross domestic product. Since the American dollar is the world’s international currency, that deficit means the rest of the world now has more dollars than before. In other words, last year an extra $530.7 billion was put on the market, a significant factor in the dollar’s devaluation. A weak dollar was something easily foreseen.
In 1996, a year before the financial crisis, our balance of payments deficit was generally at about 6 percent of our gross domestic product. If its currency were not in international circulation, the United States would be dangerously close to a crisis. To deal with the situation, countries dependent on exports to the United States, such as Korea, China, Japan, Taiwan, Singapore and Hong Kong, have piled up nearly $2 trillion in their foreign currency reserves. By buying dollars, these countries are trying to prevent their own currencies from rising in value so as to maintain their export levels. There are limits to such measures, however, and China has been moving to decrease its dollar reserves, making matters yet more difficult for Korea.
It now looks impossible to artificially stop the revaluation of the won. At this point, no amount of intervention in the foreign currency market can stop the upward charge of the won. What is more important now is to maintain the yen and the won at a 10:1 ratio to keep giving Korean exports a competitive edge. It is critical that we create a framework for won-yen synchronization.
The premature revaluation of the won and the pain it has caused to small to medium firms that depend on exports, could have been avoided if the government had engineered a “soft landing” for the currency rate and given exporting firms more time to adjust.
The government’s heavily oscillating currency rate policies are extreme, and only contribute to market instability.
* The writer is a professor of economics at Myongji University. Translation by the JoongAng Daily staff.
by Yoon Chang-hyun