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S.Korea may put more weight on exports than inflation

08-03-2011 15:08 BJT

SEOUL, Aug. 3 (Xinhua) -- South Korea's policy priority for this year will be ostensibly placed at taming inflation, but in reality, more weight seems to be put on exports than inflation as the nation's authorities are estimated to have intervened in the local foreign exchange market.

The country should have allowed the local currency to appreciate further against the U.S. dollar to curb consumer price hikes caused by imported inflation, but the foreign exchange authorities are estimated to have implemented smoothing operations to prevent the won's excessive ascent versus the greenback.

Evidence of the authorities' intervention was found in the foreign reserves data released Tuesday by the Bank of Korea (BOK). Foreign reserves reached a fresh high of 311.03 billion U.S. dollars as of the end of July, up 6.55 billion dollars from a month earlier.

The figure was a turnaround after contracting for two straight months in May and June. The BOK attributed the July increase to rising investment profits on the reserves and growing conversion value of pound- and yen- denominated assets amid stronger British pound and Japanese yen.

The pound appreciated 2.3 percent against the dollar last month, while the yen rose 4.7 percent versus the greenback.

Unlike the BOK's statement, local media estimated the reserve increase mostly stemmed from the authorities' dollar buying.

The reserves were estimated to expand by at least 3 billion dollars last month even after excluding the rises in investment profit and conversion value.

According to local media reports, the investment profit was estimated to have increased the reserves by 1.5 to 2 billion dollars in July. The calculation was based on the average profit rate of 6.49 percent, which was shown in the report submitted by the BOK to the National Assembly last year.

Given the proportion of non-dollar denominated assets to the total reserves stood at less than 40 percent, the reserves were estimated to have grown by 1 to 1.5 billion dollars last month due to a rise in conversion value of pound- and yen-denominated assets.

"We are estimating that the reserves increased by around 3 billion dollars last month due to the authorities' intervention, but nobody knows the figure exactly as the local foreign exchange market is operating over the counter (OTC)," Park Jun-cheol, a currency analyst at Samsung Futures in Seoul, told Xinhua Wednesday.

"I cannot ascertain the truth about the estimates as the checkout will have an impact on the market," an official at the BOK said by phone, adding the estimates were calculated on limited and non-updated information.

The official noted that the conversion value of non-dollar denominated assets is now moving to a larger extent than in the past as the reserves breached above the 300 billion dollar level, saying the major currencies, which form non-dollar assets, appreciated sharply against the greenback.

Despite the official' s refusal to the checkout, the government has been estimated to continue its intervention in a bid to boost the export-driven economy. Exports, which account for around half of the nation's economy, reached a new high of 51.4 billion dollars in July, sending the trade surplus to a record high of 7.2 billion dollars.

Top economic policymaker also confirmed the authorities can intervene in the market if necessary. "If there are steep fluctuations in currency rates, our basic stance is that we could implement smoothing operations to ease the herd behavior in the market," Finance Minister Bahk Jae-wan told reporters on July 11.

The nation's authorities were estimated to implement smoothing operations even in August to stop the won from rising sharply against the greenback. The local currency rose above the 1,050 won mark against the dollar at one time on Monday after news that the nation's trade surplus hit a fresh high last month, but the won closed at 1,050.5 won, paring its earlier gains.

The won's gain was reportedly limited due to the smoothing operations, through which the authorities were estimated to buy dollar funds worth around 1 billion dollar.

"The weaker dollar is the global trend as the ample liquidity supply by the Fed has been putting downward pressure on the dollar," Sam Hong, senior vice president in charge of currency strategy at Shinhan Bank in Seoul, told Xinhua.

Hong, however, predicted the appreciating pace will differ depending on the currency, saying the South Korean won will rise at a relatively slow pace as the nation's authorities will conduct smoothing operations.

The slower appreciation of the won will help local exporters keep price competitiveness in the global export market. The nation's exporters such as Samsung Electronics and Hyundai Motor have benefited from the relatively slow appreciation of the local currency.

The won has appreciated less than 7 percent against the dollar since September 2008, compared with 40 percent ascent of the yen, 29 percent of the Australian dollar and 15 percent of Thai baht over the cited period.

The smoothing operation may not be in line with senior government officials' comments that policy priority for this year will be placed at curbing inflation.

Finance Minister Bahk, who took office on June 2, has repeatedly said top priority for economic policy will be placed at keeping price stability. Bahk shared the view on the importance of price stability with BOK Governor Kim Choong-soo in his first meeting with Kim held in mid-June.

The BOK is widely expected to raise its benchmark interest rate by 25 basis points to 3.5 percent at the August rate-setting meeting slated for next Thursday. The nation's consumer prices jumped 4.7 percent in July from a year earlier, breaching the upper ceiling of the BOK's inflation target band of 2-4 percent for the seventh consecutive month.

"Despite high inflation, the corporate- friendly government cannot sit back and watch the won's appreciation," Park at Samsung Futures said, adding that the intervention looks somewhat conflicting with the government's anti-inflation measures.

Editor:Wang Xiaomei |Source: Xinhua

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