[EDITORIALS]Leave the won aloneThe government has asked the Bank of Korea to play a more active role in the foreign exchange market even by mobilizing the capability of issuing notes. It is tantamount to an open demand that the central bank lead the way in suppressing the appreciation of the won’s value against the U.S. dollar. Such an open demand by the government for intervention is not desirable.
We do not mean to neglect the won’s appreciation. As the danger of side effects is considerable, while the effect of intervention is not clear, it is better to refrain from it and act in a refined way even if we decide to do so.
First of all, it is not nice to see the deputy prime minister of economy requesting the central bank governor to intervene in the market. How could there be a government that demanded the central bank to intervene in the market? Korea is a country that has long been suspected of manipulating exchange rates. The government’s open demand to intervene could bring unnecessary misunderstandings. Moreover, the central bank has earned the distrust of the market by unreasonablly lowering the call rate.
It is true that the exchange rate of the won aginst the U.S. dollar has appreciated sharply. An abrupt drop in the exchange rate of the U.S. dollar to the Korean won will hold back export businesses, dealing a blow to the last bastion of the Korean economy. But it can’t justify the intervention. The recent trend of a falling dollar is not a temporary phenomenon that can be reversed by the central bank’s intervention. To the contrary, it will drop further if the current trend continues. The reason that the speed of the won’s appreciation was faster than other currencies recently was because foreign exchange authorities prevented the won’s appreciation earlier through unreasonable intervention.
There will be a limit in intervening in the market by issuing more bank notes. It is highly likely that the effect of intervention will deminish gradually, only benefiting those who want to sell dollars.
The bigger problem is that If the central bank intervenes by issuing more notes, the volume of currency will increase and to absorb the money released into the market, the bank will have to issue more currency stability bonds. Already the bank is paying trillion of won in interest on such bonds. The government should not harm both prices and the exchange rate by aiming to catch them with one stroke.