The U.S. Congress greeted the election of President Lee Myung-bak with congratulations and unusual resolutions. Various economic signals from America, however, appear to be far from congratulatory. A case in point is the foreign exchange rate.
The U.S. dollar fell to its lowest level in 35 years against a basket of six other major currencies Monday, sending crude prices above $100 for the first time as global investors scurried to the black gold as a hedge. Nothing could be worse economic news for Korea, the 10th largest consumer of oil, which relies on foreign imports for 97 percent of its demand.
Washington of course can ill afford to care about others. The Fed's repeated rate cuts to shore up the flagging economy following the subprime mortgage crisis have so far been of little use, sending only adverse ripple effects throughout the world.
Like any economic phenomenon, the strong currency has its ups and downs. For a small and open economy (Korea is the 13th largest in the world but the gap with the big five is huge) that lives on exports, however, the downsides completely overshadow the upsides. The falling parity rate plus cost-push factors resulting from a steep increase in raw material prices is driving Korean exports out of the United States and other major markets. Some import prices could go down only to be completely offset by the jumps in key material prices in this resource-poor country. A shift to domestic demand-oriented economic structure is desirable in the long term, but cannot be an immediate remedy, as it takes time.
Misfortune never comes single-handedly and nowhere is this truer, than in the economy: The exchange rate emergency comes on top of galloping inflation and slowing growth ― a catch 22 for the new economic team.
It may sound cruel but this also provides the best test for the economy-oriented new government to turn the crises into opportunities. Lee's first economic czar, Kang Man-soo, is a veteran financial bureaucrat, who served as deputy finance minister when the nation was hit by the financial crisis.
The Lee administration officials will hate it, but much is going to be the same as 10 years ago, except that this country's economic scale has grown far bigger and its foreign exchange pockets far deeper.
Minister Kang is a known interventionist, who believes the government should play an active role in interest and foreign exchange rate mechanisms. The interest rate is a different story but as far as the currency market is concerned, this is a time for Seoul to at least show willingness to step in if necessary and not give global speculators misguided signals.
``We all were blinded by the brilliance of the semiconductor boom,'' said Kang 10 years ago as a self-rebuke. Leaving the finance ministry, he also said: ``The dinosaur is gone now.'' Koreans will be keeping their fingers crossed that the new economic team, which some say is a revived dinosaur, will not be blinded by anything this time and prove it is a totally different one from a decade ago.