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[FOUNTAIN]The won gets pounded

Published: 17 Jan. 2006, 22:01

A government that makes the empty threat of intervention in the market against currency speculators is like the boy who cried wolf. If one cries wolf too often, he is seen as a liar and no one will listen to his words. The worst failure of trying to talk up a currency market was in England. It was when George Soros became the “emperor of exchange speculation.” Sept. 16, 1992 is known as “Black Wednesday.” To Soros, it was his day of glory on which he forced the Bank of England to surrender, but it was the most humiliating day for British politics and economics in 25 years.
Back then, the market viewed the devaluation of the British pound as just a matter of time. The British government, however, thought differently. On Sept. 12, John Major, then the prime minister, declared that he would “protect the pound from any speculative attempt.” It was a strong attempt at intervention, but speculators merely mocked his words and sold more pounds than ever. A total of 23 billion pounds was bought by the government but the currency’s value still dropped.
On Sept. 16, at 11 a.m. the Bank of England raised the interest rate from 10 to 12 percent. At 2:15 p.m. it raised the rate once more, this time to 15 percent. In the bank’s 300-year history, it had never raised rates twice in one day. At 6 p.m. Britain finally gave up defending the value of the pound. The British government lost 3.3 billion pounds and Soros earned $1 billion in a week. On Oct. 27, 1997, during the financial crisis, the Korean government tried to talk up the won. Back then, the market viewed the devaluation of the won as just a matter of time. But the government opposed this. Officials said the government would “firmly maintain the 930-won exchange rate,” and added, “speculators will be publically named and punished strictly.” However, the won’s value only dropped faster. Two days later, the government gave in.
Since the start of 2006, the exchange rate has been an issue. The exchange rate even dropped below 980 won. A remark by the governor of the Bank of Korea has become a point of contention. Because of his words, the market fluctuated more and protecting the exchange rate became more costly.
Milton Friedman, a supporter of exchange rate speculation, said, “Exchange rate speculators buy a currency when its value is low and sell when its value rises, therefore contributing to stabilizing the exchange rate.” The government opposes speculators but the market chooses who it thinks is more reliable. Who the market will choose is cause for concern. It makes one wonder whether the government has already cried wolf.

by Yi Jung-jae

The writer is a deputy business news editor at the JoongAng Ilbo.