The Korean currency hit a 45-month low of 1,089.40 won to the U.S. dollar Tuesday, rebuking the financial authorities for their reckless market intervention to prop up its value. It is regrettable that the Ministry of Strategy and Finance and the Bank of Korea (BOK) wasted about $20 billion of the nation's foreign exchange reserves last month in an unsuccessful bid to stem the slide of the won.
What's more worrisome is that the authorities have lacked policy coherence at least as far as the won-dollar exchange rate is concerned. Shortly after President Lee Myung-bak took office on Feb. 25, the finance ministry and the central bank maintained a policy of allowing the won to become weaker against the greenback in a move to boost exports and thereby speed up economic recovery.
However, the depreciation of the local currency increased the risk of higher inflation on the back of spiking prices of crude oil, other natural resources, grain and food. On July 7, the Lee administration shifted its position to intervene in the Seoul currency market to block a further loss of the won over the dollar. The finance ministry and the BOK officially formulated their intervention policy, saying that they would mobilize foreign reserves to boost the value of the won.
There was no doubt that the aim of the invention was to bring soaring inflationary pressure under control. Following the market intervention, the local currency rose to 1,002.30 per dollar July 11 from 1,042.90 July 7. But after spending the $20-billion reserves, the central bank had to give up its costly intervention late last month, causing it to fall to 1,012.2 won per dollar on July 31. It is apparent that the authorities have fallen into the very trap that they created to appreciate the won.
The BOK has also no other choice but to halt its intervention partly because the greenback, which had long been weaker against the euro, the yen and other currencies, showed a rebound amid an economic slowdown in the European Union and Japan. That is, the bank can no longer maintain its active hands-on policy due to the high costs and the global rebound of the U.S. dollar. From the beginning of this month, market participants have rushed to buy the dollar, prompting the rapid devaluation of the won.
In conclusion, the incoherent and misguided policies have led to a loss of market confidence. This policy failure has only provided market participants with chances of betting on the dollar to make windfalls. The weaker won is likely to do more harm than good to the Korean economy. It is not expected to help the nation's exports by a sizable margin. On the contrary, the losing won is feared to cast a dark cloud over the economy, triggering a vicious cycle of higher inflation, lower consumption, sluggish investment and an economic slowdown.
It is urgent for the authorities to ensure policy coherence and regain lost market confidence in a bid to stabilize the won-dollar rate and keep inflation in check.