No intervention yetThe Korean won’s downward spiral is exacerbating the jittery local financial markets.
The won has been on a losing streak against the U.S. dollar and Japanese yen for weeks as mounting concerns over a credit crunch in Eastern European countries hiked up demand for the greenback.
The dollar shot up to 1,506 won Friday, a level last seen in November, sparking talks of a new financial crisis.
Some market players and experts are calling for the authorities to step in to moderate the won’s plunge after it broke the 1,500 won barrier, while others talk of another downturn in the making.
Both the call for government’s hand in the currency market and reckless talk of a crisis only add to the market unrest.
Making hasty moves and snap judgments every time the won so much as twitches only aggravates the volatility in the currency markets.
The won’s latest downward spiral is mostly driven by the dollar’s strengthening amid broad fears of insolvencies in global markets, rather than by domestic factors.
There are no recent indicators that point to a deterioration in the Korean economy’s fundamentals or its outlook.
Thus, once the uncertainties in the global market calm down, so will the won?dollar exchange rate.
On the other hand, if market anxiety continues, the period of a comparatively devalued won may drag on.
Either way, financial authorities cannot afford to pour out dollar reserves in order to ease the won’s fall in the midst of the strong dollar trend.
It would be a losing game for the authorities if they step in at this stage with anything more than smoothing the market. They should restrain from placing bets with currency reserves, which would be a sure loss.
But that doesn’t mean authorities should stay out of the game altogether. They should closely watch the market and jump in to stabilize the market if and when necessary.
Korea has $200 billion in its currency coffers. The reserves are savings for a rainy day. If the market cries out for help and intervention, the authorities should do so wisely and in a timely fashion. At the same time, the authorities should seek various other ways to reinforce our foreign reserve liquidity in case they are in for a long battle.
When the government does interfere, it should do so with the broad understanding and trust of market players.