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FX dilemma as won appreciates

Minister says gov’t can intervene, but Washington is on alert
Apr 06,2018
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Finance Minister Kim Dong-yeon on Thursday stressed that the Korean government will intervene in the foreign exchange market if it develops extreme volatility.

“We will definitely act accordingly if the market shows sharp volatility,” the Kim said. “[Reporting the financial authorities’ intervention in the market] will be determined by our own lead and it will not be related to the free trade agreement [with the U.S.]”

There are growing concerns that the Korean government will be restrained from intervening in the foreign exchange market because of pressure from Washington.

The Korean won has been appreciating against the U.S. greenback, which will negatively affect Korea’s exporters.

The Korean won appreciated against the greenback Thursday, closing at 1,059.7 won, losing 0.1 won from Wednesday’s close.

Since April 2, the won has been trading below 1,060 won to the U.S. dollar for the first time in nearly three and a half years.

The appreciation is not surprising considering the fact that Korea’s trade surplus has lasted for 74 consecutive months and foreign reserves have reached to $400 billion. But the appreciation also accompanied intensifying pressure from the Donald Trump administration to improve Korea’s market intervention transparency.

The U.S. Treasury Department said last month that the U.S. government is working on limiting the Korean financial authorities’ intervention in the market.

“An agreement [memorandum of understanding] is being finalized on robust provisions to prohibit competitive devaluation and exchange rate manipulation in order to promote a level playing field for trade investment,” a report by the Treasury Department said, adding that transparency and accountability are being included in the provision.

The U.S. Treasury Department is preparing to announce its semiannual report on foreign exchange policies of major trading partners later this month.

Korea was among the countries including China, Japan and Germany that were placed on a monitoring list in the last report released in October.

According to the U.S. Treasury’s last report, between July 2016 and June 2017, the Korean financial authorities were estimated to have net purchased $5 billion of foreign exchange, which is equivalent to 0.3 percent of the nation’s economy, to keep the won from appreciating.

“Ahead of the U.S. Treasury report, the [Korean] financial authorities have been taking a low-key stance,” said Jeon Seung-ji, a currency analyst at Samsung Futures.

According to a study by the Hyundai Research Institute, when the won appreciates 1 percent against the dollar, the nation’s overall exports shrink 0.51 percent. By industry, machinery exports are hit the heaviest with a 0.76 percent drop and IT exports lose 0.57 percent. Automotive exports falls 0.4 percent while chemical and steel fall around 0.3 percent.

Korea has seen its currency appreciate sharply.

Last year, the won appreciated 12.8 percent compared to a year earlier, which is faster than the 8.35 percent appreciation of the Taiwanese dollar and 3.25 percent for the Japanese yen. The euro, on the contrary, depreciated 12.15 percent during the same period.

The recent moves by the Trump administration have been compared to the Plaza Accord of 1985 that started a 20 year economic slump in Japan. The Plaza Accord forced an appreciation of the Japanese yen for the purpose of improving the price competitiveness of U.S. exported goods.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]