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Sat, January 23, 2021 | 22:36
Editorial
Brexit and currency war
Posted : 2016-06-28 16:56
Updated : 2016-06-28 17:17
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Ensuring financial stability is top priority

In the aftermath of Britain's vote to leave the European Union last week, fears are mounting that the world might plunge into a currency war.

On Monday, China's central bank cut the yuan's fixed rate by almost 1 percent to 6.6375 to the dollar as the greenback surged after the Brexit vote. Monday's fix was the lowest level since December 2010.

Japan is also ready to act as the yen, one of the haven assets bought in times of turmoil, hit a 32-month high of 99.02 per dollar Friday after the vote. Japanese Prime Minister Shinzo Abe said Japan would carefully watch foreign exchange and stock markets, but his remark was taken as indicating that the world's third-largest economy could intervene in the currency market soon to put the brakes on the surging currency.

The Swiss National Bank already intervened in the currency market in reaction to the United Kingdom's exit from the EU and says it will do more to ease upward pressure on the Swiss franc.

It's also likely that the U.S. Fed will give up its plan to raise its key rate and rather opt to cut the rate in what could be a move to stabilize the global situation. And there is no question that the EU must hold on to its quantitative easing for a considerable time.

Of course, all these competitive depreciation moves by major economies are intended to boost exports by devaluing their currencies. But these must be beggar-thy-neighbor policies that, by pursuing their own interests, would make the economic problems of other countries worse.

What makes Brexit all the more ominous in relation to foreign exchange rates is that current circumstances differ much from those following the 2008 global economic debacle. At the time, countries actively worked together to stabilize stock and currency markets worldwide. This time, however, they seem inclined to go their separate ways to remain alive through competitive currency devaluations amid the strong wind of isolationism around the world.

The fact is that countries have to address their problems on their own. Against this gloomy backdrop, the global economy might get lost and slip into a deeper slump as Brexit has thrown the world into an unprecedented path not trodden over the past decades.

Of course, there is no need to overstate the economic backlash, considering that several years are needed before the U.K.'s "leave" vote becomes a reality. To be sure, now is the time for countries the world over to do their utmost to minimize the adverse impact through international cooperation.

There is no room for complacency though. Korea, in particular, needs to respond to challenges proactively, taking into account that the nation already has been struggling with sluggish exports.

The government should act resolutely to prevent jitters in the financial sector from spilling over into the real economy. What is urgent therefore is to brace for the worst by securing as much foreign currency as possible. This will require the government to expand currency swaps with major economies.

Emailsahds@ktimes.com Article ListMore articles by this reporter









 
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