Trials and tribulations in the coalition of the unwilling
Good luck to the South Korean government and to the Bank of Korea. They'll need it.
South Korea’s finance ministry said on Friday it would mobilise all possible means to curb the won’s recent sharp appreciation against the US dollar.Korea is the most battered member of the East Asian bloc propping up the US dollar. Perhaps "bloc" is too strong a word. "Coalition of the unwilling" might be better for it certainly describes Korea's participation in it.
The statement came a day after the currency hit an eight-year high against the greenback, intensifying concern among government officials that the stronger won could hurt exports, which account for more than a third of Asia’s fourth-largest economy.
“We’re deeply worried about moves in the foreign exchange market that can’t be seen as normal,” said Kwon Tae-shin, a vice finance minister, after chairing an emergency meeting with central bank and trade ministry officials and other regulators. “The market has seen an excessive herd mentality because of speculative forces.”
Led by the Chinese peg to the USD -- or rather now, the Chinese "basket" which continues to function as a crawling near-peg to the USD -- the Japanese yen, the Korean won and the Taiwanese dollar (along with their respective central banks) are also moving in a flock, trying desperately to hold their currencies down by holding the dollar up in order to keep China's pace.
Korea has rebelled briefly several times in the past against membership in a coalition which is costing the Bank of Korea billions. Back in May 2005 the Koreans tried it when the won dipped under 1000 to the USD. They tried it in February 2005 as well to no effect. The problem was always the pain of a rapidly rising currency which the government and the Bank of Korea could not stand.
The won found some relief in the summer and fall of 2005 as the dollar rose across the board. However, since October the won has reversed course -- and rapidly so. In mid-December the rise became a rocket and the Koreans once again have found themselves between the Scylla of the yuan and the Charybdis of the USD.
The won is trading at levels unseen since the 1997/98 Asian financial crisis, driven by the country’s economic recovery and strong exports, and has gained 2.3 per cent this weekWithout the capital controls on financial inflows, surrended upon membership in the OECD back in the 90s, Korea is resorting to attempts to drive money out of the country as fast as possible. But this is a tide which won't be held back for long. The tried and true answer: More central bank reserves, sir? Your order will be coming out shortly -- and we don't care how full you are!