Yesterday the US dollar started at 999.5 to the Won on Seoul's foreign currency market, W5.7 lower than it had the previous day, and it was quite a disturbance. It started when Park Seung, head of the Bank of Korea (BOK), told the Financial Times that he does "not anticipate increasing the amount of foreign reserves further." It said his remarks "imply that South Korea is now unwilling to undertake the intervention required to stem its currency's rise." The report came out at night, and the exchange rate crumbled. The BOK said things had been misrepresented, and Deputy Prime Minister for Finance and Economy Han Duck Soo said Park's comments regarding foreign currency reserves "have nothing to do with policy on the foreign currency market." The exchange rate soon returned to above the W1,000 mark.
What transpired is not something that should be taken lightly. The Financial Times' interpretation was not unreasonable. The balance of payments is in the black so there is an overflowing of dollars, and so to say you aren't going to increase foreign currency holdings means on the market that you are not going to be buying any dollars. Maybe Park just meant to predict what the trend in foreign reserves. But nowhere will you find anyone doing anything in the currency market who would take the BOK governor's words lightly. Anyone responsible for foreign currency needs to be extremely prudent with what he says about the exchange rate. There is an expression that says managing the exchange rate is like playing poker with the market. You cannot win if you show your cards. The BOK has issued an explanation, but the market still thinks what it saw was a revelation of its hidden intentions.
BOK was already being watched closely by the market. The government's only practical tool for control, the national treasury bonds, have run out and so the exchange rate has essentially been left to the nation's central bank. Last February as well, BOK issued a report to the National Assembly that hinted at a diversification of the currencies in Korea's reserves and sent waves across the international exchange market. These are serious mistakes, so before it issues those explanations BOK needs to engage in deep self-reflection.
The Hankyoreh, 20 May 2005.
[Translations by Seoul Selection (PMS)]
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