South Korea: A Collapse Of The Won?
One of the currencies that I am watching most closely right now is the Korean won. Currently trading around KRW1,050/US$, I see the risk of an extended fall to KRW1,200/US$, or even beyond. The currency has been suffering all year, due to trade deficits derived from high oil prices, and massive selling of Korean shares by foreign investors, who have become increasingly concerned about the country’s deteriorating economic outlook.
The Korean authorities have been intervening aggressively to boost the won, and have spent at least US$20bn in recent months to counteract selling pressures, but with only limited success. This begs several questions:
- Can FX intervention work, when downward pressures on a given currency are so severe, or do market forces always prevail?
- At what point would the Korean authorities declare ‘enough is enough’ and let the won go (i.e., how much more of Korea’s US$250bn of forex reserves are they willing to spend)?
- At what point would the level of intervention become so heavy that this would frighten investors even more than had there been less intervention?
- If the Korean authorities stopped intervening in the FX markets, how far would the won fall? 1,200 to the dollar? 1,400? Even further?
- What would be the impact on the economy and political system? Would the government of Lee Myung-bak survive with its credibility ruined?
- Would other Asian (or other emerging markets) currencies of countries facing similar challenges also sell-off sharply?
Perhaps I am scaremongering, but it’s not too soon to start asking these questions.
August 21st, 2008 at 4:25 pm
You’re not scaremongering. When it comes to central bank intervention, verbal or otherwise, talk, and indeed actions, can sometimes be cheap.
I’m very interested to see how the won reacts tomorrow morning. The dollar sell-off looks like it has further to run, which would be won positive, but the simultaneous bounce in oil is won negative.
As you say, if 1050 gives way, it could move sharply lower.