South Korea increases currency market intervention

Section:

10:40p ET Wednesday, July 9, 2008

Dear Friend of GATA and Gold:

The story appended here from the Korea Times in Seoul may be notable for disclosing some desperate central bank intervention in the currency markets and for quoting an economics professor's observation that the high price of oil is supporting the dollar, since oil is traded largely in dollars and the higher oil goes, the more dollars are needed to purchase it. Of course there are lots of dollars to be absorbed lately, and maybe this is what President Bush and Treasury Secretary Paulson now mean by their "strong-dollar policy."

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Intervention Pulls Won-Dollar Rate to 1,004

By Kim Jae-kyoung
Korea Times, Seoul
Wednesday, July 9, 2008

http://www.koreatimes.co.kr/www/news/nation/2008/07/123_27321.html

The government's heavier-than-expected intervention panicked the currency market Wednesday, sending the won-dollar rate below the 1,000 won level at one point during intra-day trading.

The won surged to 998.9 won against the U.S. dollar at around 12:30 p.m. after the government sold around $3 billion to the market. The won closed at 1,004.9 won per dollar, up 27.8 won from the previous close.

It was the first time that the exchange rate dropped below the 1,000-won level since April 29 when the won was traded at 998.

The government's intensified intervention came two days after the Ministry of Strategy and Finance and the Bank of Korea pledged to work together to intervene in the currency market to curb a further slide of the Korean won.

Following the sell-off of dollar holdings, the government also verbally intervened in the market to send a strong message that it will not allow the won to weaken against the greenback.

"The foreign exchange authority's efforts to stabilize the won will not stop here," Choi Jong-ku, head of the ministry's international financial division, said.

"Additional measures will be carried out until one-sided expectation on the course of the won will die away," he added.

Market analysts said that the remark was a kind of declaration of war against the market to curb weakening of the won and keep inflation in check.

But they said that while the move can change the level of the exchange rate, it will not reverse the trend, citing economic fundamentals supporting a weaker won.

"The government showed its strong stance on the exchange rate Wednesday. I think it aims to pull down the rate below the 1,000 won level," Citigroup economist Oh Suk-tae said.

"I hope the government achieves its intended goal. If it fails and steps back from its strong stance, its credibility will get a fatal blow," he added.

However, given that the current economic fundamentals have remained weak, many are skeptical over whether the aggressive intervention will achieve its intended goal.

"The depreciation of the local currency is a natural phenomenon reflecting current economic fundamentals, such as widening current account deficit, rising demand for the dollar caused by high-flying oil costs and massive sell-off by foreign investors in the local stock market," Sungkyunkwan University economics professor Lee Jae-woong said.

"If the government steps in over and over, chances are that it will waste a huge amount of foreign reserves without achieving its intended goal," he added.

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