South Korea currency firms briefly on dollar-selling intervention

Sep 3, 2008, 4:27 GMT

Seoul - The South Korean won was briefly lifted against the US dollar in morning trade on Wednesday, apparently due to suspected dollar-selling intervention by the government.

The slide was temporarily stopped after the South Korean currency fell to a session low of 1,159 won at one point late Wednesday morning. It is suspected that earlier losses were cut as foreign exchange authorities poured in an estimated 1.5 billion dollars.

'It is believed that the dollar selling took place for one hour this morning, as the government must keep the won value above the 1140-level, which is usually seen as the psychological threshold,' said one foreign exchange dealer in Seoul.

The South Korean won hit its weakest since August 18, 2004, on Wednesday with the benchmark index plunging to its lowest level in 17 months as a slowing economy pushed bond and stock funds to move money out of South Korea.

The won has lost almost 18 per cent versus the dollar so far this year, putting upward pressure on already high inflation.

The slowing global demand, combined with inflation has raised concern that a repeat of the 1997 financial crisis may strike Asia's fourth largest economy, which the government tried to deflect Wednesday.

'Our economy is expected to undergo significant difficulties,' said Lee Sung Tae, governor of the central Bank of Korea. 'But it is still my judgement so far that the economy won't go as badly as it was in the 1997 crisis,' he added.

South Korea currently holds 243.2 billion dollars of foreign exchange reserves, which is below the IMF-recommended level of 320 billion dollars. In 1997, the short-term foreign loan stood at 63.7 billion US dollars, which was three times as much as the foreign-exchange reserve.

As of the end of June 2008, short-term foreign loans stood at 175.8 billion US dollar, representing 72 per cent of total foreign-exchange reserve, according to the central Bank of Korea.

South Korean corporations have reduced debt rate. The average debt rate by major manufacturing companies reduced from around 400 per cent in 1997 to around 100 per cent in 2007.