Behind the scenes, gov’t tries to control the won

Korea’s foreign exchange authorities have been engaged in a quiet war in recent months to hold down the won, throwing more firepower at it than they have in years in a bid to support exports and keep the economy on its fragile recovery track.

The dollar-buying accelerated as the won hit six-year highs and crept toward 1,000 to the dollar, a psychologically symbolic level that policy makers appear reluctant to see broken quickly. It stood at around 1,019 per dollar late on Friday.

The authorities have said they intervene only to smooth volatility, blaming “herd” behavior for pushing up the won.

Yet for now, even though the government wants to rebalance the economy toward consumption and away from exports, growth still relies on trade and a strong won hurts, hence the stepped-up intervention.

Some dealers estimated authorities’ net dollar buying at $12 billion in May. HSBC economist Ronald Man said in a report on Thursday that intervention that month may have been the largest since November 2009.

While President Park Geun-hye has been keen to stimulate domestic consumption, demand has been crimped by the April ferry accident that killed more than 300 passengers. That darkened the public mood and hurt activity in a number of sectors, including retail and travel.

Exports, meanwhile, have suffered from slow growth in China, Korea’s biggest market.

On Thursday the Bank of Korea cut its economic growth forecast for this year to 3.8 percent from 4 percent.

Despite a stance in favor of free markets, Korean authorities have long intervened in currency markets, which has caused friction with the United States and the International Monetary Fund.

“The government has no choice but to support exports as there is a limit to what it can do to boost domestic consumption,” said Jeon Seung-ji, an analyst at Samsung Futures.

South Korea’s long positions in foreign currency forwards against the won stood at $54.647 billion in May, IMF data released June 26 showed, the highest in three years.

That indicates authorities bought spot dollars and later swapped them, which prevents dollar-buying intervention from showing up in foreign reserves data.

IMF data on the country’s aggregate long positions in forwards in foreign currencies has shown the positions rise in line with the won’s acceleration, as authorities try to restrain the currency.

“We can’t say all of the increases in the forwards data come from intervention, but they definitely are linked to it,” said Lee Dae-ho, a foreign exchange analyst at Hyundai Futures.

However, dealers at multiple banks in Seoul said there has been a surge in intervention in recent weeks.

The won has not strengthened above 1,000 since mid-2008, coming closest at 1,008.4 on July 4.

The implications of a stronger currency were evident last week when Samsung Electronics cited it as a major factor when it gave weaker-than-expected earnings guidance.

If upward pressure persists, intervention is unlikely to ease under the leadership of the incoming finance minister, Choi Kyung-hwan, who told lawmakers last week that domestic economic conditions were “dire” and he would do his utmost to stabilize markets.

The won weakened as investors feared further intervention.

“After Choi takes office, the most important thing that will be watched by markets will be the speed of the intervention,” according to one foreign exchange dealer at a bank in Seoul.

“They will keep trying to regulate the pace and lessen fluctuations as the won nears 1,000.”

Reuters