Fluctuating Exchange Rates Causing a Headache

With the North Korean nuclear threat and the looming Iraqi war, the won is on the rise in the long term, in a staggering pattern, 10 won against a dollar every day.

The volatile exchange rate may hamper industrial production, consumer prices, and balance of payments.

The widening won-to-dollar gap appears serious. According to the Bank of Korea on March 19, from March 1 to March 17, the average fluctuating range compared to the previous day and that for during the day were 7.5 won and 11 won, respectively, up from 5 won and 6.1 won last month.

Fluctuations as compared to the previous day (today`s closing price vs. yesterday`s closing price) have been extremely volatile since February, after falling 2.5 won in January 2003 from 4.4 won during the fourth quarter of last year. The range of fluctuation during one day (the highest vs. the lowest during a day) also has surged to a range of 4.7 won in January of this year.

The average exchange rate volatility for a day in the nation is higher than that of Thailand (0.24%), Taiwan (0.14%), and Singapore (0.21%).

The won-to-dollar exchange rate jumped 70 won to 1,250 won per dollar in March, from the average 1,180 won per dollar last year.

The unstable won-to-dollar exchange rate is due to foreign investors selling won to buy dollars, with additional jitters over the market, stemming from the North`s nuclear threat and SK Global`s accounting scandal.

Dollar purchases by foreign investors this year sharply rose to 1 billion dollars from 290 million dollars in the fourth quarter of last year.

Since February, foreign investment in securities has fallen by 1.1 billion dollars; 280 million dollars were invested in January while 740 million dollars were taken out of the market in February. From March 1 to March 13, investments saw a loss of 270 million dollars.

According to a survey conducted by the Financial Supervisory Commission (FSC), 86.6% of large conglomerates and 67.8% of mid-sized companies are preparing for the risk of foreign exchange rate volatility.

Nevertheless, trading of hedge funds such as that for forward exchange was only 46%, while 54% was to deliberately advance or postpone the settlement date for export and import accounts and foreign exchange. The number of the staff responsible for risk management of foreign exchange averages 1.7 persons in large conglomerates and 0.8 persons in mid-sized companies.

Foreign exchange loss for local companies was 2.423 trillion won in 2001. Continued fluctuations in exchange rates will result in larger losses, the BOK said.

The nation`s central bank stressed that companies that have a large number of foreign exchange transactions should establish a taskforce for risk management and mid-sized companies should take advantage of banks or related consulting firms.

Foreign exchange authorities should aggressively intervene in the foreign exchange markets when the exchange rates are temporarily disproportionate to supply and demand.

“Fluctuations in exchange rates affect consumption, investment, production, consumer prices, and balance of payments, through the volume of exports and imports, and prices,” said Assistant Governor of BOK Lee Jae-wook. “It is time to decrease the risk of foreign exchange amid these geopolitically uncertain times.”

Kwu-Jin Lim mhjh22@donga.com