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[Editorial] Unstable foreign exchange rates

Posted January. 03, 2001 19:39,   


The Korean currency, which began dramatically fluctuating last November, dropped as low as 1,300 won to the U. S. dollar Wednesday.

With the government's expression of concern over the rapid depreciation, the won-dollar exchange rate somewhat stabilized later in the day, but the financial market still saw one of the biggest daily exchange rate fluctuations since the financial crisis three years ago.

From some quarters, voices were heard that the won's depreciation would serve to boost exports, while others said the exchange rate hike was too steep. Some warned that with the U.S. economy on the downturn, Korea would have to be especially cautious.

Amid the conflicting analyses, the government issued an optimistic forecast, saying the won's depreciation was caused by "psychological instability" and would therefore begin to stabilize in the near future. Undermining this bright outlook is the fact that the won has been sliding since November.

Aggravating the situation was increased demand for dollars, caused by seasonal factors such as demands for payment of imported goods, which are concentrated at the beginning of the year. Hence, an excessive pessimism is undesirable at this juncture. There is no denying that the won's depreciation also owes to external factors such as the movement of speculative international hedge funds, which are beyond internal control.

However, attention should be paid to analyses made by foreign investors in Seoul and Korean experts on foreign exchange, both of whom have said the primary causes of the current woes is the sluggish financial restructuring and political instability. Noting that these experts focused on domestic factors, more fundamental countermeasures are required to address them.

Given that the political stability cannot be achieved overnight, the won's value can hardly be expected to settle down unless the government releases massive amounts of dollars and effectively implements the structural reform of the financial sector. But the government should refrain from direct intervention in the domestic financial market because such measures would surely produce negative side effects, as was seen in the past. Accordingly, most important is for the government to infuse confidence in both domestic and foreign investors that restructuring is moving ahead.

The intensive purchase of dollars by local enterprises and individuals on the premise that the rate is likely to continue its rise will only serve as another factor driving up exchange rates. Even if authorities are unable to prevent domestic firms or individuals from pursuing their own interests, the Korean people need to be reminded that one of main factors that caused the 1997 financial crisis was dollar speculation.

Owing to the possibility of government intervention in the local financial market, the won's value was maintained on Wednesday. Nonetheless, it is hard to imagine that the currency has been stabilized. At this juncture, the government needs to work out basic and comprehensive measures to cope with current turmoil in the foreign exchange market.