Korean currency 3rd most volatile
By Cho Jin-seo
Staff reporter
The Korean won was one of the most vulnerable currencies to external shocks, with the currency ranking third among the 32 major currencies in terms of volatility during the financial crisis.
The report from Korea Institute of Finance (KIF) also said that Korea's open and highly liquid capital market is backfiring against its economy, making it an easy target for speculators in turbulent times.
Only the South African rand and Brazilian real were more volatile than the Korean won during the 2008-2009 financial crisis.
The won has become the "proxy currency" for the whole of Asia because it is so easy to take money in and out of Korea, said Park Sung-wook, the author of the paper.
"Korea's financial markets are more open than other Asian markets, and they are more liquid. Therefore, whenever international investors want to rebalance the portfolio of their Asian funds, they buy or sell assets in Korea first, and then assets in less open and liquid markets such as China and Southeast Asia," Park said on Tuesday.
He also adds that the "stigma effect" from the previous Asian financial crisis may have prompted suspicion on the strength of the Korean currency.
The comparison was made on 32 currencies of countries included in the FTSE advanced and developing markets indices, excluding China and Hong Kong, which use a de-facto currency peg system. It was also done separately for two time periods, firstly on the pre-crisis years of 2005-2007, and secondly from September 2008 to December 2009.
During 2005-2007, the won did well and placed 20th in volatility. It was when the currency was gradually appreciating against the dollar. Between 2008 and 2009, the volatility soared to the level three to four times higher than that of its Asian neighbors, such as Singapore, Taiwan and Malaysia.
KIF research heightens the increasing skepticism by academics on the open-market based economic policy. A number of well-known economists and policymakers are becoming vocal in criticizing that Korea was too naive to open its financial markets over the past two decades, on advice from rich Western countries and international organizations such as the International Monetary Fund.
Some insist on more fundamental changes. Shin Jang-sup, professor of economics at National University of Singapore, points out that Korea is the only Asian country except Japan that uses a free-floating exchange rate regime, while others use various systemic defense measures such as peg-and-crawl.
The government is determined to keep its current free-floating exchange system.
Instead, it is mulling lighter measures to reduce financial volatilities.
Last month, it introduced a limit on banks' foreign exchange derivatives positions in order to stabilize the foreign exchange rate.
Park, the author of the KIF paper, suggests other solutions as well, such as increasing investment in assets denominated in foreign currencies, and allowing offshore trading of the won.