Korea Looks After Number Won

[momopi]

http://www.forbes.com/markets/2008/10/0 ... ets06.html

Korea Looks After Number Won
Vivian Wai-yin Kwok, 10.09.08, 7:15 AM ET

HONG KONG - When the finance minister of South Korea is forced to warn his own exporters not to hold up the U.S dollar, it starts to look as though the Seoul government is scrambling for ideas to boost the currency won.

Finance Minister Kang Man-soo on Thursday asked the country's exporters to sell their dollar holdings instead of betting on the won's further decline. "It seems that export companies think there are chances for the won to weaken further," Kang said during a meeting with executives from smaller companies, "but [export companies] could suffer huge losses if they overreact... The opinion has been handed over to them, a pool report distributed by the finance ministry quoted Kang as saying.

The remarks came as local currency dealers complained that export companies were not selling the greenback in recent days. The South Korean won, which has dropped about 17.0% this week and 31.0% since last year, has seen some of the biggest declines among various Asian currencies amidst the global credit crisis.

The Bank of South Koreas move on Thursday to cut the countrys benchmark seven-day repurchase rate by a quarter percentage point to 5.00%, is expected to further undermine the won as it will slash returns on holding the currency.

That was a surprising and risky decision since it could add even more pressure to the currency, which is the number one concern for the Korean economy right now, said Sebastien Barbe, Asia senior economist/fx strategist at Calyon in Hong Kong.

Sharon Lam, an analyst of Morgan Stanley also said it was surprising that the Bank of Korea had cut rates when the Korean won was depreciating so sharply.

The Seoul stock market inched up only 0.6% on Thursday after the rate cut, while Korean won slumped earlier in the day to 1,484.90 per U.S. dollar, the lowest level since the Asian financial crisis of 1998, before rebounding to 1,383.30.

Central bank Governor Lee Seong-tae indicated there might be more cuts in coming months, which worried some analysts. The rate cut is a doubled edged sword," said Lim Tae-geun, a market analyst at Daewoo Securities. "It's positive to tackle global market turmoil, but the rate cut may fuel further falls in the won, and the foreign exchange rate is a big issue in Seoul markets today."

Yiping Huang, an economist with Citigroup in Hong Kong, said the big risk to South Korea was its short-term foreign debt. In his report published Thursday, Huang revealed that South Koreas short-term loan amounted $260.4 billion, more than the countrys foreign reserves of $242.2 billion. Huang said that South Korea faced the highest risk in the Asia Pacific region of a sudden reversal of financial flows.