Bracing for a bumpy year

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Bracing for a bumpy year

The global financial market has started the year on a shaky note. The Swiss central bank’s move to scrap its cap on the Swiss franc’s exchange rate against the euro caused its value to spike 41 percent and sent had wild repercussions global exchange and equity markets. The Korean shares plunged and the won appreciated sharply.

The Swiss bank’s removal of the minimum exchange rate pegged to the euro was sudden, but not entirely unforeseeable. The central bank has been intervening in the market to keep its currency stable since 2001, after money poured into the country, which was seen as a safe haven amid instability in other parts of the eurozone. Monetary authorities have struggled to keep the exchange rate near to the euro at a floor of 1.2 francs.

Their strategy involved selling francs on the open market in exchange for euros to help sustain key export companies in luxury products and pharmaceuticals, which their economy heavily relies on. But the prolonged downward spiral of the euro has made the exchange policy too costly. Since the summer of 2011, the Swiss National Bank (SNB) maintained the cap by printing francs on a regular basis. The bank said “enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified” due to widening divergences between the monetary policies of major currency areas.

The SNB concluded that it cannot go on buying euros to protect its currency and a quantitative easing program would only further weaken the euro and increase the cost of maintaining the peg. Its move is based on the forecast that the depression of the euro and its economic zone will continue for some time. The turbulence in the global market has been sparked by more renewed concerns for the eurozone and global economy than the SNB move alone.

Under these circumstances, global capital will seek safer places to invest, increasing the strength in the U.S. dollar and weakening in the euro. The local stock and exchange markets would also be affected by the phenomenon and could be hurt by the collective selling spree in emerging economies.

The question is whether the Korean economy is strong enough to keep calm and resilient against outside shocks. The Bank of Korea downgraded its growth outlook for 2015 to 3.4 percent from the 3.9 percent it estimated last year and the 3.8 percent forecast for this year by the government. The economy must be ready with stronger local demand to brace itself for a bumpy year.

JoongAng Ilbo, Jan. 17, Page 30

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