US threatens Korea's forex sovereignty
By Yoon Ja-young
Amid concern the country will “lose sovereignty” in its foreign exchange market operations following an agreement with the United States to improve transparency, the Korean won is rapidly strengthening against the U.S. dollar, threatening the profitability of exporters. While the government says it will have no problem controlling foreign exchange fluctuations, analysts say the agreement is likely to be a shackle
The Korean won closed at 1,054.2 won per dollar, Tuesday, the lowest rate in more than three years.
On top of the lessening geopolitical tension ahead of a summit with North Korea, the announcement that the country is negotiating with the United States to improve the transparency of its foreign exchange “smoothing” is pulling down the won/dollar rate.
Though the two countries have not finalized details on how to improve transparency, the government and central bank are expected to disclose their “smoothing operations” on the market. Like any other country, Korea has been selling or buying dollars to decrease exchange fluctuations. To enhance transparency, however, it plans to disclose such interventions.
“The foreign exchange rate is basically determined by the market, but smoothing operations are accepted globally in the cases of huge fluctuations. There will be no change in policies even if we disclose them, and we will continue with such operations,” a finance ministry official said.
However, the market doesn't seem to agree. Analysts say Korea is likely to decrease its interventions, with some estimating the won/dollar rate may fall below 1,000 won if the government loses control.
“While the Korea-U.S. Free Trade Agreement (FTA) revision is expected to have a negligible impact on the domestic economy, the agreement on the foreign exchange market will have an extensive impact, from exports and inflation to foreign investment, as the government has officially decreased room for intervention,” said Lee Mi-seon, an analyst at Hana Financial Investment.
She said it can even restrict the central bank's normalization of monetary policies. “As exports face uncertainties due to the stronger Korean won, the central bank will have limited room in key rate policies,” she said.
Konkuk University professor Oh Jung-geun said Korea may follow in the footsteps of Japan which suffered two lost decades due to a strong yen following the 1985 Plaza Agreement.
“The problem is the government will have no means at all, even when intervention becomes necessary,” he said.
Oh pointed out the country can see a current account surplus for diverse reasons other than an undervalued Korean won. For instance, the bullish semiconductor market pulled up total exports and the plunge of imports due to slowed growth led to a surplus.
“If Korea evaluates its currency thinking the surplus is due to a weak Korean won, all other exporters will be threatened,” he said.
According to a report by Hyundai Research Institute, a 1 percent fall in the won/dollar rate decreases exports by 0.51 percent.
He also pointed out the United States is allowing Japan to maintain a “weak yen” policy. “The over-valuation of the Korean won coupled with undervalued yen will significantly damage local firms. The government will be shackling itself by disclosing smoothing operations.”
Despite the steep fall of the won/dollar rate, the government is hesitating to take any measures as it awaits the U.S. Treasury Department's April report on foreign exchange rate manipulators. In its semiannual report, the United States designates a country as a currency manipulator if it meets the three criteria of a current account surplus, trade surplus with the U.S. and the purchase of dollars in the market. Korea was put on the monitoring list in the October report as it met the first two criteria.
“The government cannot overlook the report. The won/dollar rate will face further downward pressure as it is hesitating over intervention,” said Jeon Seung-ji, a foreign exchange analyst at Samsung Futures.