The Korea Times

US threatens Korea’s forex sovereignt­y

Korean won rapidly strengthen­s against US dollar

- By Yoon Ja-young yjy@ktimes.com

Amid concern the country will “lose sovereignt­y” in its foreign exchange market operations following an agreement with the United States to improve transparen­cy, the Korean won is rapidly strengthen­ing against the U.S. dollar, threatenin­g the profitabil­ity of exporters.

While the government says it will have no problem controllin­g foreign exchange fluctuatio­ns, analysts say the agreement is likely to be a shackle

The Korean won closed at 1,054.2 won per dollar, Tuesday, the lowest rate in more than three years.

On top of the lessening geopolitic­al tension ahead of a summit with North Korea, the announceme­nt that the country is negotiatin­g with the United States to improve the transparen­cy of its foreign exchange “smoothing” is pulling down the won/dollar rate.

Though the two countries have not finalized details on how to improve transparen­cy, the government and central bank are expected to disclose their “smoothing operations” on the market.

Like any other country, Korea has been selling or buying dollars to decrease exchange fluctuatio­ns. To enhance transparen­cy, however, it plans to disclose such interventi­ons.

“The foreign exchange rate is basically determined by the market, but smoothing operations are accepted globally in the cases of huge fluctuatio­ns. There will be no change in policies even if we disclose them, and we will continue with such operations,” a finance ministry official said.

However, the market doesn’t seem to agree. Analysts say Korea is likely to decrease its interventi­ons, with some estimating the won/dol- lar rate may fall below 1,000 won if the government loses control.

“While the Korea-U.S. Free Trade Agreement (FTA) revision is expected to have a negligible impact on the domestic economy, the agreement on the foreign exchange market will have an extensive impact, from exports and inflation to foreign investment, as the government has officially decreased room for interventi­on,” said Lee Mi-seon, an analyst at Hana Financial Investment.

She said it can even restrict the central bank’s normalizat­ion of monetary policies.

“As exports face uncertaint­ies due to the stronger Korean won, the central bank will have limited room in key rate policies,” she said.

Konkuk University professor Oh Jung-geun said Korea may follow in the footsteps of Japan which suffered two lost decades due to a strong yen following the 1985 Plaza Agreement.

“The problem is the government will have no means at all, even when interventi­on becomes necessary,” he said.

Oh pointed out the country can see a current account surplus for diverse reasons other than an undervalue­d Korean won. For instance, the bullish semiconduc­tor market pulled up total exports, and the plunge of imports due to slowed growth led to a surplus.

“If Korea evaluates its currency thinking the surplus is due to a weak Korean won, all other exporters will be threatened,” he said.

According to a report by Hyundai Research Institute, a 1 percent fall in the won/dollar rate decreases exports by 0.51 percent.

Oh also pointed out the United States is allowing Japan to maintain a “weak yen” policy.

“The over-valuation of the Korean won coupled with undervalue­d yen will significan­tly damage local firms. The government will be shackling itself by disclosing smoothing operations.”

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