Seoul interventions risk red faces at G20

A conflict over exchange rates promises to dominate next month’s summit of the G20 leading economies in Seoul.

Although South Korea, as president, will have to lead the debate, it must tread carefully to prevent its own currency interventions from becoming an uncomfortable part of the argument.

South Korea’s won attracts heavy speculation from the markets as the only big Asian currency that still lies below its level against the dollar when Lehman Brothers collapsed in 2008, despite a robust economic recovery and a bullish stock market. By contrast, the Japanese and Australian currencies have both climbed more than 20 per cent.

Although traders say the Bank of Korea has been active in cooling the won’s appreciation, they add that Seoul is increasingly bending to market pressure and has permitted an 8 per cent rise against the dollar in the past three months.

“With the International Monetary Fund meeting upon us and next month’s G20, South Korea has
no appetite for being
seen to be in the market,” said Tim Condon, head of Asian research at ING.

Officially, South Korea’s finance ministry says it does not defend a specific value for the won against the dollar or yen, but “will take stabilising measures in case the exchange rate suddenly spikes or falls because of herd behaviour”.

Many traders and opposition politicians are sceptical. They believe a lobby group from the big exporters – or chaebol – dictates the weak level of the won. When grilled on this pressure from industrial giants such as Samsung and Hyundai at a recent parliamentary commission, the finance minister, Yoon Jeung-hyun, replied that it was “very far from the truth”.

Still, Masaaki Shirakawa, governor of the Bank of Japan, has cited the yen’s rise to “levels close to its record high” against the won as a factor in Tokyo’s decision last month to intervene in its currency for the first time in six years.

The president of Sharp, the electronics group, has highlighted the difficulty of competing on cost against Korean companies benefiting from the weak won. Between 2000 and 2007, one yen averaged Won9.7; this year it has averaged Won13.04.

A Japanese government official said Tokyo had “serious concerns” about won weakness, even though these had not been publicly aired. “We are searching for clear evidence of manipulation,” he said.

Currency traders say the Bank of Korea makes “aggressive” and “substantial” interventions in the market and recently has spent more than $1bn daily.

South Korean foreign exchange reserves hit a record $290bn in September, from $285bn in August. Traders attributed this to intervention, which the central bank denies.

Bond traders add that Seoul has cooled moves to list its sovereign paper in a widely-tracked index be-cause it is keen to avoid an influx of won investment.

Erik Lueth of Royal Bank of Scotland said South Korea’s interventions as a share of daily spot trades were “minuscule”. He attributed the undervaluing of the won to the country’s high indebtedness and fears about North Korea after the torpedoing of a South Korean warship in March.

“The Bank of Korea is leaning with the wind, but in total terms its intervention is not that significant,” he said.

Additional reporting by Kang Buseong in Seoul and Jonathan Soble in Tokyo