Gov`t Announcement Lowers Dollar

The government and the Bank of Korea announced yesterday that they would stabilize the nation’s foreign exchange market with the nation`s foreign exchange reserve. The statement reflects the government’s strong will to intervene in the market so as to keep surging consumer prices in check.

The Ministry of Strategy and Finance and the central bank released a joint announcement regarding recent fluctuations in the foreign exchange market.

At a press briefing, Choi Jong-goo, head of the international finance department of the Finance Ministry, said, “The government has not publicly discussed this, but it has consistently been intervening in the market by selling some of its foreign exchange reserve. If necessary, it is inevitable to sell some of the reserve, which is the fifth or sixth biggest in the world ($258.1 billion as of late June) to stabilize the market.”

It seems that the government made such a public announcement to let the people know of the government’s strong will to stabilize the foreign exchange market. However, it is exceptional for the government and the central bank to make a joint announcement to admit their intervention in the market. Also, the fact that the government replaced Vice Finance Minister Choi Joong-gyeong, who supports the high foreign exchange rate policy, is likely to affect the market.

Although the government has sold up to $10 billion for the past month to stabilize the market, the won-dollar exchange rate recorded 1,050 won per dollar Friday, the highest in 32 months. The central bank estimates that an increase of 10 won in the won-dollar exchange rate would raise consumer prices by 0.08 percentage point.

In the wake of the government’s announcement, the exchange rate temporarily fell to 1,036 won per dollar during the day yesterday. However, as investors rushed to buy dollars at a cheaper rate, the exchange rate went up again, exceeding the 1,040 won mark. Overall, the rate fell 7.5 won from Friday to close at 1,042.9 won.

legman@donga.com jarrett@donga.com