Currency war looming

Intervention likely once won-dollar rate falls below 1,100

By Kim Tae-jong

The specter of a global currency war is looming large as central banks in advanced economies rush to join quantitative easing in order to inject new vigor into their economies and make their products competitive across global markets.

Following the introduction of stimulus packages by the U.S. Fed and Bank of Japan, the Korean won has continued to gain ground against the dollar. The won rose to a yearly high of 1,114.8 per dollar, Wednesday.

Experts said that Korea’s financial authorities will intervene in the market if the won-dollar exchange rate falls below the 1,100 mark.

“I think 1,100 won is the psychologically-important mark,” Jeong Young-sik, research fellow at Samsung Economic Research Institute. “The financial authorities will consider taking action if the value of won surpasses that.”

Concerns are growing on currency depreciation policies by major economies, especially after the Bank of Japan Thursday announced it would add another 10 trillion yen to its asset-buying program and extend it to the end of 2013.

The move came just six days after the Federal Reserve came up with plans for quantitative easing.

The U.S. and Japan took such measures to bolster their sluggish economy but their decision has put financial authorities in other countries on high alert due to consequential effects on the global economy, especially countries that depend heavily on exports.

“Japan seems to have taken such measures due to the yen's strength, which has put its economy in trouble. And emerging economies such as Brazil seem to take a similar step to cope with quantitative easing. It could be seen as currency dispute,” Jeong said.

Emerging economies have actively taken direct interventionist measures to cope with such quantitative easing polices due to the huge impact of growing global liquidity on their economy.

In emerging markets, speculators can take advantage of interest rates that are higher than those in the U.S., Europe and Japan and profit on the difference between the two.

It is also true that emerging markets depend on exports, which become more expensive when exchange rates rise.

Brazil has conducted so-called "reverse dollar swaps" to prevent its currency from appreciating, Peru adjusted its intervention strategy toward weakening the Peruvian Nuevo Sol, and Turkey cut interest rates by more than expected.

The Korean government has remained silent on the matter, taking a cautious view of the upturn in its currency, but expressed discontent against quantitative easing steps by major central banks.

“Quantitative easing steps by major central banks are providing difficulties to us in managing macroeconomic policy tools,” Bank of Korea (BOK) policymaker Lim Seung-tae told reporters.

But market insiders believe that all newly-generated cash can be used as speculative funds in emerging markets and they will be tempted to cut interest rates to offset their currencies appreciating too much.

So this may also affect the BOK’s monetary policy, especially on the base interest rate that stands at 3.0 percent.

The BOK has been very cautious on the base rate. It kept the key rate untouched at 3.25 percent for 13 months straight before it cut it to the current level in July.

“Due to massive inflow of liquidity from advanced economies, our key interest rate is seen as relatively high now,” Kim Chung-han, fellow researcher at the Korea Institute of Finance. “So the central bank may need to lower the rate to cope with the situation.”

He also said the government would take a limited interventionist measure such as purchasing dollars in the financial market to prevent the won from appreciating too high against dollar.