When will the rollercoaster ride for the Korean won end?

When the won-dollar exchange rate fluctuated by 46 points Friday, Goh Gyu-yeon, a senior dealer at Korea Exchange Bank, could not eat lunch because his eyes were fixated on a monitor with the won-dollar exchange rate fluctuating by 10 points in an instant.

The Korean foreign exchange market took a rollercoaster ride as the government and market were in a tug-of-war. With external factors destabilizing the market standing out, the won was on the brink of falling to the 1,200 level.

The government intervened, however, sending the won soaring. Under such a repeating situation, dealers at the bank sighed, with one saying, "(The government) is going too far."

○ Rollercoaster ride

Before the foreign exchange market opened, experts predicted the won would fall to the 1,200 level. This is because they expected the value of the dollar to rise since it is considered a safe asset.

The won fell to 1,225 against the greenback at one time in the non-deliverable forward (NDF) market and stocks in Europe and the U.S. tumbled Thursday.

So foreign exchange authorities were busy devising measures before the market`s opening. The Strategy and Finance Ministry and the Bank of Korea held a meeting on macro-economic policy coordination early Friday morning and announced that both sides will take necessary action to prevent the foreign exchange market from fluctuating.

The ministry also called in representatives from exporters such as Samsung Electronics and Hyundai Motor to urge them to cooperate in stabilizing the market. This was a de facto request for the companies to change dollars they earned through exports into the won instead of keeping them to increase dollar supply in the market.

The government announcement sent the won-dollar rate, which soared to 1,195 as soon as the market opened, falling to 1,150 after skyrocketing in one minute.

With dollar demand by importers increasing and investors buying dollars outside of the market, however, the won tumbled again to the 1,190 level after less than an hour. Net selling of Korean stocks by foreign investors also pushed the dollar`s value higher.

The won stabilized to the low and mid-1,190 level for a time from 10 a.m. but fell to 1,196 in the afternoon. Massive government intervention two minutes before the closing of the market, however, sent the won rising 30 points to close at 1,166.

"Foreign exchange authorities have recently injected 1 billion to 2 billion dollars into the market but seem to have released more dollars today," said Goh.

The government`s intervention caused the won`s value to rise, but the currency will remain on a downward path due to a host of unfavorable external factors such as the European fiscal crisis, said experts. This is because strong buying of dollars outside of the market makes it difficult for the government to stop the won from falling and market intervention has its limits.

Jeon Seung-ji, a researcher at Samsung Futures, said, "Dollar buying is strong due to external factors such as the European fiscal crisis. In addition, fears are rising over an economic downturn not only in advanced countries but also in developing nations," adding, "The won can fall to 1,270."

○ Dollar exodus raises fears over FX shortage

Quite a few experts say the recent fall in the won`s value is a signal that foreign investors are selling dollars to leave Korea. Others, however, said foreign investors will not completely withdraw their investment from Korea because foreign net buying of Korean bonds reached 3.8 trillion won (3.2 billion dollars) though they sold Korean stocks worth 4.6 trillion won (3.9 billion dollars).

With European investors selling Korean stocks and bonds en masse this month, more than 6 trillion won (5.1 billion dollars) worth of foreign investment has evaporated. Foreign investors are apparently trying to secure liquidity to prepare for global contingencies.

French investors hit hard by the Greek fiscal crisis net sold 440 billion won (375 million dollars) worth of Korean stocks and bonds.

The foreign investors` headquarters in Luxembourg, a global tax haven, sold 320 billion won (273 million dollars) worth of stocks in September alone. They did so to liquidate stocks under the judgment that hot money aimed at short-term profits will further destabilize the market.

With more foreign investors converting Korean stocks and bonds to dollars and transferring the money to their home countries, fears are mounting over a foreign currency shortage in Korea. The country`s foreign currency holdings soared to 312.2 billion dollars late last year from 239.7 billion dollars in September 2008, when the last global financial crisis started.

Despite this, certain experts are urging the Korean government to keep a close watch on the outflow of dollars, warning that a rapid exodus of dollars will destabilize the foreign exchange market regardless of the foreign currency amount.

For its part, the government is focusing on the prospect that the latest situation will not last as long as the 2008 crisis. A financial authority source said, "The financial market is rattling though investors were fully aware of unfavorable external factors. This is a signal that the U.S. and Europe-triggered crises will not be resolved over the short term."

redfoot@donga.com dew@donga.com