Korea’s Emphasis on Growth Drives Currency Lower

Posted by: Ihlwan Moon on March 21, 2008

Recent movements in South Korea’s foreign exchange market underline how government policymakers could influence the extent of a currency’s fluctuation. As Finance Minister Kang Man Soo and other top economic policymakers suggested the new government would give priority to growth through boosting exports after President Lee Myung Bak took office on Feb. 25, market players took it that Seoul would tolerate the fall in the Korean currency, the won.

Such growth-first approach prompted the won to lose its value rapidly. Sure the won had been already under selling pressure by foreign investors who unloaded their holding in Korean stocks to secure liquidity in the wake of a global credit crunch. But the Korean currency’s fall picked up pace shortly after Lee’s new economic team made clear that it would not give up “sovereignty” in its foreign exchange policy by completely letting the market decide rates.

The won dropped 12 trading days in a row until Mar. 17, losing its value against the dollar by nearly 9% in the month alone when most major currencies gained value against the greenback. Then policymakers began making verbal interventions on Mar. 18 only after the won closed at a 27-month low of 1,029.2 to the dollar on the previous day, saying Seoul was concerned and would take actions if deemed necessary. Earlier in the month officials declined comment on the rapid slide of the currency.

That raised speculations on the market that policymakers view just over 1,000 won to the dollar as a comfortable level. A cooling U.S. economy and turmoil in the global financial market will surely force the won to swing in weeks to come but some bet it will remain in a 1,000-1030 won range in the near future given the timing of the intervention by the Seoul mandarin.

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