Posted February. 23, 2005 22:43,
The exchange rate of the won against the U.S. dollar once dropped to 998.1 won yesterday in the Seoul Foreign Exchange Market. It is the first time in seven years and three months since November of 1997 that the rate went below the 1,000 mark. The government explained that it was a happening that resulted from a wrong interpretation of a Bank of Korea report about diversification of foreign reserve investment into a policy of selling the U.S. dollar in the market.
However, it is hard to see the collapse of the 1,000 won mark as a one-off happening. There is a great chance that private experts predictions realize that the won-dollar exchange rate could drop to the early 900 won range by this year. That is because many structural factors are promoting a strong won, including the weak dollar resulted from the U.S. twin deficits, Koreas accumulated balance of payment surplus, and the inflow of foreigners stock investment funds.
Exports would be the most vulnerable sector in case the country faces a three-digit exchange rate. According to a survey conducted by the Korea International Trade Association, 68 percent of 730 exporting companies believe that a disruption in exports is unavoidable with a lower-than-1,000 won exchange rate. There are also great chances that marginal small-and medium-companies, which stay afloat by low prices alone, would be forced out of business.
However, it is neither desirable nor possible for the government to intervene in the foreign exchange market for purposes other than blocking speculation and adjusting speed. Under the circumstances, all economic players should be quick to prepare for the era of a three-digit exchange rate. Exporting businesses should overcome the possible drop in price competitiveness by reducing production costs and enhancing quality at the same time.
The government should speed up revitalizing domestic investment and spending, as the recovery of domestic demand and increase in imports could ease the excess supply of the dollar. Also, the government should draw up measures to nurture domestic capital in order to lower the over-dependency on foreigners in the stock market. Otherwise, there is no way that the country can overcome its financial backwardness, which sees the stock market and the foreign exchange market fluctuate at the same time whenever foreign capital flows in and out of the market en masse.