South Korea moves to strengthen won
July 10, 2008
SEOUL — The won rose sharply against the dollar Tuesday following an earlier announcement by South Korea’s government to strengthen its weakened currency.
After beginning the week at 1,050 won to the dollar, the currency spiked to 1,032 won to the dollar Tuesday.
If the government’s plan to strengthen the won works, it likely would keep prices for off-post goods more stable in the long run; however, servicemembers would lose the advantage in currency exchange they’ve had since late last year.
The dollar dropped as low as 898 won in November, but it had risen 15 percent as of Friday’s market close.
Bankers, economists and currency traders had mixed opinions on how effective the government would be in shoring up the falling won.
Some say it won’t make much difference because of the weak global economy — a problem for the South Korean economy, but not for short-term spending power among the military community.
"That’s what I’m hoping for, a weaker won," said Courtney Henry, who was in Uijeongbu visiting her husband, Pfc. Fred Henry, who is on an unaccompanied tour.
The Henrys said that even with the stronger dollar this year, prices for furniture, brand-name clothes and other goods are more expensive than they are in the United States.
The rise in servicemember spending power has had little do to with the underlying fundamentals of the dollar, which has weakened against nearly all other major currencies during the past year.
Analysts say the won has weakened for various reasons. The basic problem is that investors are pulling money out of South Korea as the global economy suffers, while South Koreans are simultaneously buying more goods from abroad than they are selling.
The result is what economists call a current accounts deficit. It means a greater supply of won, making them less valuable.
But merchants must still use that less valuable won to buy imported goods, which causes inflated prices at South Korean stores and affects servicemembers who shop off post in the long term.
The Ministry of Strategy and Finance and the Bank of Korea said in a joint statement Monday they would make fighting price inflation a top priority.
"We are concerned about the currency market being skewed in one direction," the statement said, referring to the weakened won.
In a later news conference, officials said they would consider selling their dollars and other foreign currency reserves to strengthen the won.
South Korea has more than $258 billion in foreign currency reserves, sixth most in the world, bank officials said.
Economist Jang Jae-chul of Samsung Economic Research Institute said he agreed with the government’s policy and believes it will stem inflation and strengthen the won.
"If the government lets the market continue to handle the won’s depreciation problems ... then there is no meaning to the existence and role of the government in setting up policy," said Jang, who expects the won to gradually rise during the next six months.
Song Jae-eun of the Korea Institute of Finance also thinks government intervention is desirable and will be effective, but with a catch.
"It takes time to figure out, obviously, whether or not this weak won trend is the result of larger market trends," Song said. "And if this is the case, the government will not be able to continue to defend the won."
If the government’s measures don’t work, they may attempt to raise interest rates; however, doing so makes loans more expensive and can limit economic growth.