The won is overvalued by as much as 29 percent given the condition of the Korean economy, a recent report by Goldman Sachs says. The U.S. investment bank released the report based on analysis whether the values of 36 major currencies properly reflect individual countries' economic conditions. The currencies of Korea's major rivals China, Japan, Taiwan, and Hong Kong, by contrast, are classified as undervalued. According to the report, the Taiwan dollar is undervalued by 16 percent, the Japanese yen by 6 percent and the Chinese yuan by about 5 percent.
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A foreign exchange dealer at the Korea Exchange Bank¡¯s main branch in Seoul
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The worldwide depreciation of the U.S. dollar has made it inevitable for the won to rise, but since the dollar started to fall in 2002, the won has risen most sharply among major world currencies. Since late April 2002, the won has appreciated 40 percent against the dollar, while the yen and yuan have rallied by a mere 7 percent. That has gravely weakened the price competitiveness of Korean companies in international markets.
The won became unusually strong in October 2004, when the Korean government virtually gave up defending the exchange rate. From 2003 to 2004, the Korean government actively intervened in the exchange market by pouring W32 trillion (US$1=W927) to defend the exchange rate, to the point where it was seen as an exchange rate manipulator in the international financial market. The government was accused of wasting tens of trillions of won on reckless intervention.
But after they were criticized by the National Assembly and investigated by the Board of Audit and Inspection, the country's foreign exchange authorities suddenly changed tack. Without either the funds or the inclination to defend the exchange rate, they have now come to be seen as a paper tiger.
Despite foreign warnings against the strong won, exporters including shipbuilders mostly release the dollars from their export earnings ($20 billion to $30 billion annually) into the foreign exchange market as soon as they get the money, further strengthening the won against the dollar. "The problem lies not only with the worldwide depreciation of the U.S. dollars but also with our government's lack of ability and intention to defend the exchange rate,¡± one expert here says. Last year, the government watched idly as domestic banks boosted the won by borrowing $47.7 billion on short-term loans. In the first quarter of this year, when short-term foreign debt increased $12.7 billion, the government hastily convened a meeting to address it. But it ended up merely asking the banks to exercise self-restraint, saying there was no way to control them directly.
A former senior Finance Ministry official said officials in charge of foreign exchange policies ¡°are shrinking back because they could face disciplinary action if their intervention produces poor results." A senior official from the Bank of Korea explained, "While the U.S. dollar has become globally weak, Korea has been brimming with U.S. dollars due to a ninth consecutive year of a current accounts surplus and the fifth consecutive year of a capital accounts surplus. All this has made inevitably made the won stronger." Early this year, the government set out a policy to galvanize overseas investments as a way to cope with the strong won. But so far it has produced no tangible results and has been accused of coming too late.
(englishnews@chosun.com )
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