By Kim Jae-kyoung
Staff Reporter
The nation's foreign exchange reserves recorded their biggest drop in history last month, as financial authorities engaged in a massive sell-off of dollar holdings in a bid to curb the won sliding against the dollar.
The Bank of Korea (BOK) reported Monday that foreign exchange reserves were $247.5 billion at the end of July, down $10.58 billion from a month before, the biggest monthly drop since records began in 1971.
The previous record was a $6.1 billion drop in November 1997 and the absolute level was the lowest in 15 months since April 2007.
It was the fourth consecutive drop since April. The reserves grew $1.88 billion in March, but fell $3.76 billion the following month. They dropped $2.28 billion in May and $100 million in June.
``The sharp fall was due to the government's intervention in the currency market in order to prevent the market from being skewed in one direction,'' a BOK official said.
In early July, the central bank and the government announced that they used foreign exchange reserves to control a further weakening of the local currency in a desperate bid to put a lid on rising inflation.
Market experts said that given the rapid rise in short-term debt over the past year, the government should be careful using reserves to manage exchange rate policy.
``Rather than trying to intervene in the foreign exchange markets, I believe the government would be much better off fixing the investment environment for both foreign and domestic companies,'' former AMCHAN Chairman Jeffrey Jones told The Korea Times.
``This would have a greater positive long-term impact on the won-dollar exchange rate than short-term market intervention,'' he added.
In particular, some analysts are raising doubts about the effectiveness of using the reserves.
``There is an impression that this government's exchange policy is more interventionist than the previous one but it doesn't necessarily means the current government is successful in controlling the won's value against the U.S. dollar,'' Standard & Poor's credit analysts Takahira Ogawa said in an interview with a local news agency.
``The use of interest rate policy is more market based than intervention in the market and in the long run it could be more effective,'' he added.
As of the end of June, Korea ranked sixth in the accumulation of foreign reserves, behind China ($1.8 trillion), Japan ($1 trillion), Russia ($568.3 billion), India ($311.8 billion) and Taiwan ($291.4 billion).
The nation's foreign reserves fell to $8.87 billion in 1997 when the financial crisis shook the nation, but they rose to $262.2 billion in 2007 thanks to a surplus of the current account and a money inflow from foreign investment in bonds and stocks.