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South Korea May Take Additional Steps to Cap Its Currency

South Korea issued a clear warning Friday that it might take stronger measures than those announced this week to cap the won's strength, as the won's rally against the yen in particular threatened local exporters.

Deputy Finance Minister Kim Sung Jin made the warnings during an interview with Reuters, after the won hit a nine-year high against the yen Thursday due mainly to the Japanese currency's sharp drop against the U.S. dollar.

The comments come amid market speculation that the government had only limited room to maneuver due to increased pressure from domestic politicians to stay away from the currency market.

"The foreign exchange market was not the main focus of the measures announced this time. I can tell you that there are steps we are studying, although I cannot disclose the details," Kim said, referring to his ministry's plans, released on Monday, to increase overseas investment. "As for market stability, the measures announced this week can be described as the tip of the iceberg."

Kim also said the government had "unlimited financial resources" to use to cap the won's strength and that the government and the central bank were closely cooperating with each other on foreign exchange policy. "Market participants should watch out as the government has closer relations with the central bank than at any time in recent years, and they should know what that means," he said.

The won was quoted at 7.7223/298 per yen in the morning Asian session Friday, retreating after hitting a bid of as high as 7.7008 Thursday, its strongest since early November 1997. The won was quoted at 936.9 against the U.S. dollar, down 0.05% from the previous session.

The won has lost about 3% since hitting a nine-year high of 912.6 against the dollar in early December, but it kept rallying against the yen because it lagged the yen's bigger drop against the U.S. unit.

Finance Minister Kwon O Kyu told reporters on Monday that the latest measures, including a three-year tax waiver on gains from portfolio investments in overseas markets, would probably result in an outflow of up to $15 billion in capital this year.

The central bank, which usually intervenes in the currency market on the finance ministry's behalf, can print money to buy dollars if necessary, but risks the cost of neutralizing the extra liquidity supplied.

Kim said President Roh Moo Hyun's comment early this month that the government was preparing for "special and determined measures" to keep the currency market stable showed that Roh was more determined than ever to defend a stable currency market.

South Korean policy makers are worried the stronger won would weaken the pricing power for the country's exporters -- or squeeze profits -- which are in severe competition with the Japanese firms in key markets for similar products.

Resilient exports despite the won's rises by 18% in 2004-2005 against the dollar and by 30 percent against the yen over the same period helped South Korea's economy, Asia's third largest, achieve the targeted 5% growth in 2006.

But the government is now worried as a recovery in domestic demand, which generates more than half of the annual gross domestic product, continues to be delayed while the global economy is showing signs of slowing growth this year.