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Poll: Exchange Rate Policy Ineffective

Posted January. 16, 2006 03:00,   


Park Seung, the governor of the Bank of Korea, delivered a message to the foreign exchange market that the exchange rate will rebound and that it will not help to fret over the rising won value. His remarks constitute a common form of “verbal interference” from the central bank.

Despite his assurances, the won-dollar exchange rate continued its downward trend. At 12:30 p.m., it fell to as low as 970.3 won per dollar.

More influential among exchange dealers than Governor Park’s message, however, was the prediction that Lotte Shopping’s simultaneous IPO in Korea and the U.K. would boost supplies of the dollar. Consequently, the foreign exchange closed at 974 won against a dollar, 10.6 won lower than the previous day.

The monetary authorities are losing influence over the foreign exchange market. Because the government has lost the trust of market players, on some occasions, those in the foreign exchange market move along a different course from the course of which the Bank of Korea has planned for the market.

Dong-A Ilbo carried out a survey on 104 exchange dealers from eight commercial banks, asking: “Do you trust what the Ministry of Finance and Economy, the Bank of Korea, and other government officials say about the foreign exchange market?” The results showed that 72 respondents (69.2 percent) answered, “No.”

A positive response came from just 32 dealers (30.8 percent), indicating that verbal interference from the authorities does not have much real influence on the exchange market.

“There’s no point in the government attempting to verbally interfere with the market. We will put our trust in the foreign exchange authorities only when the Bank of Korea buys dollars and make those purchases in large quantities,” said dealers.

In contrast, in other major economies, including the U.S., a single word from the mouths of central bank governors or finance ministers can make a difference in the exchange market.

In fact, foreign exchange dealers in Korea are reluctant to trust their own foreign exchange authorities because they have suffered losses due to their confidence in the government. As a result, the government now has to bear higher costs to manage the foreign exchange market, a serious byproduct of mistrust.

“If the government enjoys the strong confidence of dealers, it takes only a few words and a purchase of $100 million to raise the won-dollar exchange rate by five won. In reality, the government has to buy $200 million to $300 million to generate the same result,” an exchange dealer explained.

Do-Young Kim nirvana1@donga.com sublime@donga.com