By Lee Hyo-sik
Staff Reporter

To effectively cope with the globally weak dollar, the government should make an all-out effort not only to stabilize the won's value against the greenback, but also to increase a portion of gold, the euro and other non-dollar assets in the nation's foreign exchange reserves, Korea Institute of Finance (KIF) said Sunday.

The institute said the dollar is likely to continue losing ground against the euro, the yen and other major currencies down the road. ``With the U.S. government keeping the interest rate at a record low level and other governments downsizing their dollar-denominated assets, the greenback will continue to weaken for the foreseeable future. But a sudden plunge of the dollar will be unlikely, given the continued flow of money into the world's largest economy from the rapidly-aging Europe and Japan,'' KIF researcher Chang Min said.

The dollar has been losing ground against other major currencies in recent months, with the massive injection of dollars by the U.S. Federal Reserve into its financial market following the collapse of Lehman Brothers in September last year. Additionally, the record-low U.S. policy interest rate and the easing of the worldwide credit squeeze has prompted international investors to invest in emerging market equities and other riskier assets for higher returns, while avoiding holding dollars.

Chang said that, coupled with a surging current account surplus, the won-dollar rate could plunge sharply if foreigners continue to bring money into the country to buy local stocks and bonds. The won-dollar rate approached 1,600 won per dollar in early March but has plummeted to less than 1,200 won as of late.

On Oct. 15, the Korean currency closed at 1,155.10 won per dollar, gaining 9.7 won in value from the previous day. It was the strongest level against the dollar since Sept. 24 last year, when it traded at 1,154.5 won per dollar.

``However, the tide can reverse at any time. The won could depreciate sharply against the greenback if foreigners take dollars out of the country en masse as in the past. In preparation for such a possible capital outflow, Korea should not only focus on stabilizing the won-dollar rate, but also on building up foreign exchange reserves when the local currency is strong,'' Chang stressed.

He then suggested the government and the Bank of Korea (BOK) cut a portion of dollars and dollar-denominated assets in the currency reserves, and make it easier for the won to be circulated abroad.

Korea's currency reserves reached $254.25 billion at the end of September, up $8.79 billion from a month ago, the highest level since June last year. U.S. dollar accounts for 64.6 percent of Korea's total foreign currency assets, with the recently surging gold amounting to a mere 0.2 percent of the reserves, or 14 tons.

In a Seoul seminar last week, another KIF researcher, Kim Chung-han, said the nation should increase its currency reserves to over $300 billion to cope with the sudden capital outflow as witnessed in the aftermath of the bankruptcy of Lehman Brothers.

Additionally, Yoon Deok-ryong, a senior research fellow at the Korea Institute for International Economic Policy, called on the government to intervene in the foreign exchange market to slow the pace of the won's appreciation caused by the massive dollar inflow. ``It is important for an outward-oriented economy like Korea to maintain the price competitiveness of its products in overseas markets. Through the exports of various industrial goods, the nation should continue to post the current account surplus and build up foreign exchange reserves to more effectively deal with a possible financial crisis.''

leehs@koreatimes.co.kr