Posted October. 09, 2008 03:06,
The won plummeted 66.9 points yesterday to close at 1,395 to the U.S. dollar, its weakest value in 10 years. The intense fluctuation of the won-dollar rate in intra-day trading despite contracted transactions reveals the structural weakness of the domestic foreign exchange market. The daily transaction average reached 11.5 billion dollars in January, but plunged to eight billion dollars last month and to 5.5 billion dollars this month. The weakened market is easily affected by a small amount of dollar purchases, driving down the won excessively.
Foreigners hold almost 30 percent of domestic stocks, which is relatively high compared to other emerging markets. The size of Koreas foreign exchange market is relatively small, however. The ratio of foreign currency transactions to domestic share holdings by foreigners from January to July was a meager 9.7 percent, much lower than 18 percent of the Philippines and 13.9 percent of India. For this reason, whenever foreign investors transfer dollars to their home countries, the won plunges.
The wons freefall is also blamed on exporters reluctance to put dollars on the market. From January to early last month, three major shipbuilders received orders worth 37 billion dollars. If orders of plant facilities are added, their order amount has not dropped from the same period last year. Despite this, forward sales, in which companies sell dollars to be paid for the contracts in advance, have diminished.
On the foreign exchange market, word is circulating that exporters are welcoming a weaker won or certain big companies are stocking up on dollars in overseas branches. Not all companies seeking profits from forex fluctuations are speculators. But those who hoard dollars despite the plummeting won deserve criticism. Big companies that only care about their profits could drag down the overall economy, regardless of the governments effort to invigorate the business environment. As Strategy and Finance Minister Kang Man-soo told the National Assembly Tuesday, the government must crack down on companies that rattle the market with speculative transactions. If the current account swings back into the black and the dollar shortage is addressed, the won can regain its value. Individual investors should also refrain from hoarding dollars.
The government is also advised to tread carefully. The injection of foreign exchange reserves into the market can only benefit speculators. In addition, excessive verbal intervention can diminish the markets trust in the government. The desirable solution to the situation is providing dollars to banks to channel greenbacks into companies who need them for import payments or repaying foreign currency-denominated loan. Over the long run, the government must address the weaknesses of the foreign exchange market since it threatens the economys soundness. A large forex market is also strong enough to weather external factors.