Korean Won Biggest Loser Against Dollar
By Kim Jae-kyoung
Staff Reporter
The Korean won has emerged as the biggest loser against the U.S. dollar, with the local currency losing value by more than 10 percent this year, moving inversely to other major currencies.
Market experts said that the won's unusual weakness was mainly caused by the government's intervention in the currency market coupled with the economy's structural weakness against external shocks.
The won closed at 1,046 won per dollar at the end of June, down 10.5 percent from 936.1 won at the end of December, according to a report released by the Bank of Korea (BOK). It was the biggest depreciation against the greenback among 20 major currencies included in the central bank's tally.
The won's movement is in contrast to those of other major currencies that have been strengthening against the greenback.
During the same period, the euro gained 7.9 percent against the dollar, while the Japanese yen and Chinese yuan also appreciated by 5.7 percent and 6.6 percent, respectively.
Most other currencies, including the Australian dollar and British pound, strengthened against the greenback, except for a few Asian currencies, such as the Philippine peso.
``The dramatic change in the value of the won in March 2008 from around 950 won to around 1,030 won per U.S. dollar was clearly a consequence of the incoming government's foreign exchange policy,'' Market Force Company CEO James Rooney told The Korea Times.
``With Korea's existing huge foreign exchange reserves, there was no fundamental need for the won to make such a dramatic shift, especially against the general flow of global currencies relative to the U.S. dollar,'' he added. `` And the subsequent volatility in the won and further depreciations were equally a consequence of instability and uncertainty created by government policy.''
Citigroup chief economist Oh Suk-tae echoed the view, saying, ``The sharp depreciation was partly due to the government's intervention policy."
``To top it off, the country's weak economic structure saddled with heavy debts is another big reason. In particular, the won's sharp depreciation indicates how serious foreigners see our economy,'' he added.
Due to rising currency volatility caused by the government's intervention in the market, the daily foreign exchange turnover by banks declined in the second quarter for the first time in two-and-a-half years.
The daily trading volume averaged $24.8 billion in the April-June period, down 9.8 percent from three months earlier, the first decrease since the fourth quarter of 2005, according to the central bank.
Rooney pointed out that the Korean foreign exchange market is still not sufficiently liberalized and still too much at risk from inappropriate government intervention.
``Maintaining imbalances in the structure of the currency market or attempting to distort its functioning for anything other than `smoothing' purposes is almost likely to have unintended consequences,'' he said.
``Unusual money flows and the responsive behavior of market participants should be read as valuable symptoms of market distortions and imbalances, and not as causes of the underlying problem themselves,'' he added. ``Then they can provide valuable diagnostic insights into the real root causes that need to be addressed.''