By Yoon Ja-young
Staff Reporter
Seoul financial authorities have lost out in their bid to curb a slide of the local currency against the U.S. dollar, with the won-dollar rate recovering to the level before the central bank heavily intervened in the market early July using foreign reserves.
The won/dollar rate once breached 1,050 won in Wednesday trading, for the first time in six weeks. The government had poured some $10 billion to keep the won's strength against the greenback in early July, but it has inched up ever since, recovering to 1,050 won now.
The Korean currency started trading at 1,052 won per greenback, up 2.6 won from the previous day. It is the first soar above 1,050 won since July 4 when it closed at 1,050.4 won.
After peaking at 1,053 won, the rate immediately fell below 1,050 won per dollar following a sale of around $300 million, believed to be government intervention.
The government had poured dollars out of the reserve when the rate rose to 1050.4 won last month, amid dumping of Korean stocks by foreign investors and increasing demand for dollars following an oil price hike. The government, along with the central bank, succeeded in pulling it down to 1002 won in a few days, but it has inched up since then, recovering to the 1,050 won mark after six weeks.
``It would have soared to above 1,100 won hadn't the government intervened,'' said Lim Ji-won, executive director at JPMorgan. Even though the won dropped back to near 1,050 won per dollar, the government intervention in July was valid as it controlled the pace of weakening, according to Lim.
She said the physical cost of the intervention is not an issue as the government is selling dollars that it had piled up when they were very cheap. ``The level of short-term foreign debt is not much of a problem either as most of the debt comes from foreign banks in Seoul,'' she added, negating concern on the mounting short-term foreign debt amid dwindling foreign exchange reserve.
While weakening of the won against the dollar in spring was a unique phenomenon amid a globally weak dollar, it is not so this time. The euro, yen and other currencies are also weakening against the greenback.
``The weakening of local currency against the dollar is a global phenomenon,'' said Song Jae-hyuk, an analyst at SK Securities. ``It is not that the dollar is good. Other currencies are worse than the greenback.''
The strong dollar reflects changes in the global financial market. The dollar is strengthening on determination that European and Japanese economies may be doing worse than the U.S. economy, the source of the global credit crunch.
Foreigners' selling of Seoul stocks is further weakening the won. Exporters are adding to the strengthening of the greenback, holding dollars on expectation that it will further strengthen.
The government is likely to continue intervention, despite the won/dollar rate having recovered to the 1,050 won level. ``The exchange rate is basically determined by the market. However, the government is keeping an eye on it to see if there is drastic fluctuation,'' Vice Strategy and Finance Minister Kim Dong-soo told reporters, Wednesday.
Inflation is too much a burden for the government to look on the soaring won/dollar rate with arms folded.
Import prices marked 50.6 percent year-on-year growth in July, the biggest rise in a decade. When excluding the foreign exchange rate effect, it rose only 34.1 percent, markedly lower than the won-denominated inflation.
The weak won will pull up consumer prices even further, suppressing the economy from recovering. According to the central bank, a one percent rise in the won-dollar rate raises inflation by 0.07 of a percentage point.
The intervention, however, won't be as strong as in July. ``Things have changed. The oil price has stabilized, and the dollar is globally strong. The need for government intervention isn't as strong as in July. It is not free from criticism on intervention either,'' Song said.
JPMorgan's Lim expected the dollar to move between 1,010 and 1,070 won, but to strengthen further in the long term. ``It is only a matter of time. The government will be slowing down the pace.''