[GLOBAL EYE]Dealing with the U.S. dollarSince a single line in the Bank of Korea’s report shook the international foreign exchange market, the Bank of Korea’s status in the international community is being discussed at home and abroad.
The day after the news that the Bank of Korea planned to change the composition of its $200 billion foreign reserve from dollars to other currencies, the Dow Jones Industrial Average fell by 174 points and the value of the U.S. dollar against the euro dropped 1.4 percent. While the turmoil has been subdued by the Bank of Korea’s explanation, Korea had to also endure the boomerang effect of the exchange rate of the Korean won to the dollar falling below 1,000 won.
Some Koreans were flattered by the shockwave the Bank of Korea had produced, saying, “The Bank of Korea has become one of the big players in the international financial market.” Some even said, “The world is watching the Bank of Korea’s move.”
Some foreign media encouraged the mood by writing that U.S. Federal Reserve Chairman Alan Greenspan’s pride was hurt and that the central bank presidents of Japan, China, Taiwan, Korea, India, and Hong Kong were more important figures in the U.S. currency policy than Mr. Greenspan. However, is it really the case?
The United States makes up for its deficit by pulling in an average of $2 billion of foreign capital daily. The size of foreign debt is about 25 percent of the size of the gross domestic product. Foreigners hold 47 percent of U.S. treasury bonds, and two-thirds of the foreign reserves of the central banks around the world are in U.S. dollars. Therefore, the U.S. economy cannot sustain itself when the foreign capital does not consistently flow in or the central banks choose to sell the U.S. treasury bonds or U.S. dollars all at once. Japan or China can make the United States suffer if they want to. However, it is only theoretically possible and not feasible in reality.
When countries abandon the U.S. dollar, the value of the dollar would fall while the value of the currencies of these countries would rise. Naturally, the value of the dollars they possess would drop.
When foreign capital does not flow into the United States and the U.S. economy is stricken, spending and consumption in the United States would fall, which would backfire to the exporters to the United States. Because of the interrelated trade cycle, abandoning the U.S. dollar is a losing game for all players.
The fundamental cause of the uncertain U.S. dollar is the discrepancy between the excessive spending of the United States and the excessive savings of other nations. Many trade partners make their living thanks to the lavish spending of the deficit-ridden United States. Especially, major Asian nations keep their currencies undervalued and constantly buy U.S. dollars in order to maintain the status quo. It is a sort of an implicit agreement with the United States.
Considering the size of the U.S. economy, especially its $33 trillion financial assets, the problem of the U.S. deficit might have been exaggerated. The United States is still the safest and most certain place to invest and the center of up-to-date technologies and innovations. It is the biggest, most liberal and open market, whose economic vitality with 3.8 percent annual growth overwhelms Europe, which grows by 1.6 percent annually. Moreover, there is a long way to go before the euro replaces the dollar as a key currency.
However, just as Mr. Greenspan had said, the lavish spending and deficit of the United States cannot last forever. In the process of correcting the global imbalance, the weakening of the U.S. dollar is an undeniable trend. Because all players are involved in the game one way or another, it is important to induce a stable devaluation of the U.S. dollar while minimizing the shock wave for everyone. That’s why some countries call for an international cooperative measure such as the second Plaza Agreement.
Of course, we cannot ignore the cost of having too many U.S. dollars. However, we should consider the low exchange rate’s boost effect on exports and the consequent benefits for the nation as a whole. When China and Japan, which have three, four times as many dollars as we do, remain silent, it might be silly to make a fuss about having more dollars than we can handle. No country would brag about the composition of the foreign reserve.
The officials in charge of foreign currency should learn to behave to suit the reputation of the Korean economy. If a weak dollar is an undeniable trend, it is more urgent to revamp the corporate conditions and national strategies in order to survive in the era with a won rate of 800 or 900 per $1.
* The writer is a senior columnist of the Joongang Ilbo.
by Byun Sang-keun