| SEOUL, July 14
SEOUL, July 14 South Korea's foreign exchange
authorities have been engaged in a quiet war in recent months to
hold down the won, throwing more firepower at it than for
years in a bid to support exports and help keep the economy on
its fragile recovery track.
The dollar-buying accelerated as the won hit six-year highs
and crept towards 1,000 to the dollar, a psychologically
symbolic level that policymakers appear reluctant to see broken
quickly. It stood at around 1,019 per dollar late on Friday.
The authorities have said they intervene only to smooth
volatility, blaming "herd" behaviour for pushing up the won.
Yet for now, even though the government wants to rebalance
the economy towards consumption and away from exports, growth
still relies on trade and a strong won hurts, hence the
Some dealers estimated the authorities' net dollar buying at
around $12 billion in May. HSBC economist Ronald Man said in a
report on Thursday that intervention that month may have been
the largest since November 2009.
While President Park Geun-hye has been keen to stimulate
domestic consumption, demand has been crimped by the April ferry
accident that killed more than 300 passengers. That darkened the
public mood and hurt activity in a number of sectors, including
retail and travel.
Exports, meanwhile, have suffered from slow growth in China,
South Korea's biggest market.
On Thursday the Bank of Korea cut its economic growth
forecast for this year to 3.8 percent from 4 percent.
Despite a stance in favour of free markets, South Korean
authorities have long intervened in currency markets, which has
caused friction with the United States and the International
"The government has no choice but to support exports as
there is a limit to what it can do to boost domestic
consumption," said Jeon Seung-ji, a foreign exchange analyst at
Even if a stronger won brings down import prices, household
incomes aren't rising much, so neither will spending, she said.
"The authorities are caught in a situation where they just
can't sit and watch the won strengthen."
South Korea's long positions in foreign currency forwards
against the won stood at $54.647 billion in May, IMF data
released on June 26 showed, the highest in three years. That
indicates the authorities bought spot dollars and later swapped
them, which prevents dollar-buying intervention from showing up
in headline foreign reserves data.
IMF data on the country's aggregate long positions in
forwards in foreign currencies has shown the positions rise in
line with the won's acceleration, as the authorities try to hold
the currency back.
South Korean authorities disputed the IMF's methodology
during its consultation last year with the agency.
"The IMF estimates with their own means and calculations but
this is a very dangerous thing. Publishing that kind of
information can bring confusion upon many people," said an
official at the Bank of Korea, declining to be identified given
the sensitivity of the matter.
LEAVE IT TO THE MARKET
The IMF advised against excessive intervention in its annual
staff report on the country's economic developments and policies
released in April.
It also said movements in the won should continue to be
determined by the market and that South Korea's reserves were
The issue is a sensitive one because the authorities are
wary of speculators betting against the government.
"We can't say all of the increases in the forwards data come
from intervention, but they definitely are linked to it," said
Lee Dae-ho, a foreign exchange analyst at Hyundai Futures.
However, dealers at multiple banks in Seoul have told
Reuters there has been a surge in intervention in recent weeks.
The won has not strengthened above 1,000 since mid-2008,
before the global financial crisis, coming closest at 1,008.4 on
The implications of a stronger currency were evident last
week when Samsung Electronics Co Ltd, the country's
biggest company, pointed to it as a major factor when it gave
weaker-than-expected earnings guidance.
If upward pressure persists, intervention is unlikely to
ease under the leadership of the incoming finance minister, Choi
Kyung-hwan, who told lawmakers last week that domestic economic
conditions were "dire" and that he would do his utmost to
The won weakened as investors feared further intervention.
"After Choi takes office, the most important thing that will
be watched by markets will be the speed of the intervention,"
according to one foreign exchange dealer at a bank in Seoul.
"They will keep trying to regulate the pace and lessen
fluctuations as the won nears 1,000."
(Editing by Tony Munroe and Alan Raybould)