Missing the Timing
After the won-dollar exchange rate falls below 1,100 won, 1,090 won has been the psychological Maginot line in the foreign exchange market. In short, the market expected the government would have a direction for foreign exchange policy while maintaining at least the 1,090 won level. This was why the market closely watched whether the won-dollar exchange rate would fall below 1,090 won on November 22. An official from the foreign exchange market said on November 23, “But the won-dollar exchange rate fell below the level too easily and it also closed at 1,089 won. Speculators that sounded the government out on the matter even developed their movement.”
The foreign exchange authorities have similar opinions. A senior official from the foreign exchange authorities said, “Speculative forces abroad overlook the role of the South Korean government to stabilize the financial market.” In other words, he actually admitted that the foreign exchange market has become speculative. He might want to emphasize the fact that the government can intervene at any time but the won-dollar exchange rate slightly increased on the same day but not for a long time.
The won-dollar exchange rate was maintained at the 1,086 to 1,087 won levels at 10:45 am on November 24 but the rate reached the 1,090 won level after he made the remarks. However, it slid again after a while. The won-dollar exchange rate showed a strong downward trend again and finally closed at 1,085.4 won, down 3.7 won from the previous trading day. It is the lowest level of the year again. The won-dollar exchange rate dropped more than 10 won for two days – 6.7 won on the 21st and 3.7 won on the 22nd. The fall gains speed as speculative forces join in.
There are numerous favorable factors that can drag down the won-dollar exchange rate. As the November minutes of the Federal Open Market Committee (FOMC) from the Federal Reserve in the U.S. were considered “pigeon,” the U.S. dollar has become weak in the global market. The U.S. dollar index, a measure of the value of U.S. dollar against six major world currencies, plunged 0.76 percent, the biggest drop in eight months. In addition, North Korea risk has greatly subsided and there are expectations that the economic growth rate will reach 3 percent this year. Furthermore, South Korea signed a standing bilateral currency swap agreement that doesn’t have maximum limits with Canada as well as extended its pre-existing swap agreement with China. With the increase in the influx of foreign capital into the domestic capital market and in exports based on the semiconductor sector, the won has become stronger.
The last thing to check at the moment when speculators bet on the decline in the won rate was the foreign exchange authorities’ intention and power. So, the market tested on the foreign exchange authorities when the won-dollar exchange rate fell below the 1,100 won level and the 1,090 won level. However, they hadn’t made move other than vocal intervention and small-scale intervention. This was why a small number of speculators made aggressive movement in the overseas market after the rate fell below the 1,090 won level.
It is true that the South Korean government should read U.S.’ countenance to even make a vocal intervention as well as purchase the currency. However, there are concerns that the government has failed to manage volatility and created the conditions that make the foreign exchange market speculative.
Min Kyung-won, a senior analyst at Woori Bank, said, “The won-dollar exchange rate would have regained the 1,090 won level if the authorities took up a positive attitude. This was because the speed of the downturn was fast and the market also felt the burden from additional decreases. However, the bottom of the market seems to be open to market participants like highway as there was no presence of the authorities in the offshore market.” The government made a critical mistake not restoring the rate to 1,090 won level and it will grow volatility in exchange rates further in the future.”
A currency dealer at a foreign bank also said, “As the government failed to maintain the psychological Maginot line at the 1,090 won level, it is tantamount to setting up the conditions that make the market speculative. The authorities must have known that speculation can easily occur because the market has low volume turnover at the end of the year but they seemed not to prepare for it.” Although the foreign exchange authorities sent a warning message that calls offshore market investors as “speculative forces,” it didn’t do anything in this situation.
There are growing pressures on the slide of the won. Jeon Seung-ji, a currency analyst at Samsung Futures, said, “As investors’ buying sentiment for U.S. dollar has weakened, leading to the slide in the value. In addition, as the long-stop has continued, the pressure on the slide of the won have grown further.”