By Kim Tong-hyung
Korean policymakers have rebuffed criticism of the nation’s exchange rate policy by the United States, denying that the country is keeping its currency artificially low.
The fear that Washington will press Seoul harder to appreciate the won appears to be influencing the foreign exchange market. The won climbed against the dollar for the third consecutive day and threatened to surge above the 1,100-won mark.
In a currency report published last week, the U.S. Treasury criticized Asia’s fourth largest economy for its control of the Korean won. It claimed the country’s recovering economy and rebounding current account surplus meant that there was “room for a greater degree of exchange rate flexibility and less intervention.”
The report, which is presented to the U.S. Congress, also slammed China for its “insufficient” progress toward allowing the yuan to appreciate. Predictably it shied away from official accusations of currency manipulation.
The won appreciated 3.6 percent against the dollar last year, which was still 24 percent weaker than its pre-crisis peak in 2007. Korea’s foreign exchange reserves grew from $201 billion in February 2009 to $287 billion at the end of last year.
The Korean government denies attempting to influence the exchange rate, and maintains that its intervention is aimed at smoothing the won’s volatility. However, Korea’s major trade partners like the U.S. and Japan wonder whether the country is keeping the won artificially low to help boost exports.
The language on Korea was clearly stronger than the U.S. Treasury’s previous report, which mentioned that Korea intervened in currency markets, but avoided criticizing the practice. Observers took the recent report as a sign that the country has been facing increasing pressure from the U.S. to allow the won to rise.
An official from the Ministry of Strategy and Finance’s international finance division discounted such concerns, claiming that the stern tone of the U.S. Treasury report didn’t indicate a changing attitude toward Korea.
“We don’t think anything is dramatically different from previous U.S. Treasury reports. The lengthier description about our exchange rate conditions was merely to describe the environment surrounding the global currency market since the economic downturn of 2008,” he said.
“The thought that the report could reduce the government’s control over currency policies is ludicrous.”
The market remains hard to convince. The won gained against the greenback to close at 1,104.7 won on Tuesday, and some analysts believe that the U.S Treasury report reinstated expectations that the won’s rise would be inevitable.
Even without the American huffing and puffing, Korea faces increasingly tough decisions about its exchange-rate policies as soaring inflation threatens to cripple its economic recovery.
Since declaring an “all-out war” against inflation at the start of the year, the Lee Myung-bak government has been losing on all fronts with the costs of essentials such as food and energy rising.
And due to the growing fear that the country is lapsing into “stagflation,” a depressing combination of slow growth and higher prices, it’s hard for policymakers to be bold about clamping down on the money supply to curb inflation.
One of the few remaining tools to combat inflation would be allowing the won to rise more actively. But that remains a remote possibility in an economy that relies so much on exports.
“It’s hard to deny that the U.S. Treasury report is pushing for the appreciation of the won against the dollar, as the market is already responding to the expectations about increased pressure from the U.S.,” said Park Sang-hyun, an economist from Hi Investment and Securities.
“It appears that the government has been allowing the won to rise to some degree in its attempt to curb inflation, and the increased pressure from the U.S. will only quicken the rise.”