Exchange rate nears critical mark

The won`s value against the U.S. dollar dropped to its lowest level in two years and nine months, so foreign exchange dealers and trading companies are paying close attention to the market trend.The exchange rate closed at 1,105.70 won per U.S. dollar Friday, marking the highest value for the won since the outbreak of the nation`s financial crisis.In March, the daily fluctuation of the South Korean currency stood at 5-10 won. It was stable with only 2 won in daily fluctuation during the past 3-4 months. However, the daily exchange rate fluctuation has been expanding since last week.In this connection, foreign exchange authorities and trading firms speculated that the foreign exchange market had regained stability. However, dealers at financial institutions said that that the market mechanism has died.

The key to the controversy is the intervention of the foreign exchange authorities in the domestic market. The market has maintained stable movements during the past several months as a result of involvement of the foreign exchange authorities whenever there is a sign of abrupt changes in exchange rates. However, the market environment changed last week. The market opened at 1,114 won early last week and closed the week at 1,105.70 won. While the market experienced a slide in the exchange rate throughout the week, there was no sign of government intervention in the market. Experts say that the sale of dollars by domestic corporations is rather a supplementary factor of the market situation.

Yet it is difficult to say that the authorities will not take care of the market in the future, simply based on last week`s phenomenon. Corporations are complaining that their export competitiveness is weakening. Already, the Ministry of Finance and Economy mentioned that it an abrupt appreciation of won is undesirable. Some analysts say that the reason the authorities recently have refrained from market involvement is that foreign investors would raise the exchange rate by exchanging won from sale of their stocks into dollar. For this reason, analysts say that 1,100 won would be the first marginal line. If the exchange rate slides below that level, the government would intervene in the market, they anticipated.

Seong Hwa-yong shy@donga.com