As oil and commodity prices continue to rise, the Bank of Korea (”BOK”) has made a strong statement by pouring as much as a billion dollars out of its hoard of $258 billion of foreign currency reserves to strengthen the won. $258 billion of dry powder to defend your currency is like having a fully loaded magnum hand gun aimed at your face if you are a currency speculator.
Anyway, upon news of this, Monday the won increased from 1,043 to a dollar to 1,032. As echoed earlier here, expect the won to continue to strengthen vs. the dollar as commodity prices rise. $150 a barrel oil? The exchange rate can likely be 1,020 to 1,000 won to the dollar.
The BOK would prefer to debase the won to spur export growth, but rising commodity prices has made that strategy untenable.
Per Bloomberg:
The [South Korean] government, which previously advocated a weaker won, has changed its stance as record oil prices push up import costs and widen the current-account deficit.
In other words, no one needs to be Adam Smith or Milton Friedman to see that cheaper oil = weaker won and expensive oil = stronger won.
36 Comments
WTF?
It’s hard to know even where to start with a fleecing of this BS post….
mjw - what the hell seems wrong with it?
In any event, with oil prices the way they are at least I shouldn’t have to worry about the won going down any lower.
Wangkon, do you think next week (when I’m going home for a holiday) would be a good time to take a lot of dollars back to Canada with me?
back to Canada? Dear god no man. Wait for Quebec to call a referendum or something.
It’s a fools game the BOK is playing, and they will lose. It might not be in the next few months, but in the long run I don’t think oil will drop a bunch and the BOK’s efforts will not produce the benefits they think they are buying. The ultimate bottom line says this money is being pissed away.
Go head BOK keep up the good work!
WangKon, currencies are relative. I assume you mean the won against the US dollar, because some currencies will strengthen with increased commodity prices.
On a side note, expect local stocks to get hammered tomorrow. Dow futures are looking very grim…
Agree with #4, Craig. They should have done what everyone else is doing - raise intrest rates, instead of pouring in hard earned tax payer’s money, in what is likely to be a fool’s game. It’s a sign that Korea is in big trouble.
As well, this is an ominous sign for the US economy when countries like Korea start selling their reserves.
If you think the US dollar is vulnerable to big selling by big Asian central banks, wait till you see the sparks.
Central banks of developing economies now hold just 52 percent of their reserves in U.S. dollars, compared to 81 percent back in 2001.
India and China have made the biggest shifts, slashing the composition of their reserves away from the dollar and into the euro, other currencies, and gold.
Recently, other influential holders of U.S. dollar reserves — Korea, Sweden, Qatar, the United Arab Emirates, and Russia — signaled they may also start cutting back their dollars.
If just a few of these central banks start pulling out of the dollar — which I believe could happen any day now — that alone will spell disaster.
What happens when the dollar plunges? Every dollar Americans have … every investment Americans own — will be severely impacted. Some will be annihilated.
What is it about the Korean Government that they find the concept of free market forces so difficult to accept.
I have to agree with #1.
A country’s currency is - in the long-term - most strongly a function of its trade surplus or deficit. Trade surpluses generally make for strong currencies as consumers in other countries want to BUY that country’s products, thus pushing up the relative value of its currency. Trade deficits, on the other hand, generally cause currencies to decline in value.
Since (South) Korea has few commodities of its own (especially oil) and commodity prices are rising, this means Korea’s trade surplus will shrink and may turn into a trade deficit. Thus, its currency should weaken relative to other currencies.
What the BOK is doing is a temporary “shore-up” measure, most likely ordered by LMB for political reasons. However, the BOK only has a finite amount of foreign reserves, and it has (strongly SHOULD) keep a large chunk of that around to stave off a repeat of the 1997 Asian Financial Crisis. So, once it uses up all of its “safe” reserves, the BOK has no more leverage to prop up the Won.
Thus, the Won will naturally fall in the face of rising commodity prices.
However, if you’re talking about the value of the Won relative to just the U.S. Dollar, you may be correct, a the dollar may fall faster than the Won, especially if enough central banks start selling off the dollar. But, the U.S. is not Korea’s main trading partner. China is.
So, maybe we should be more concerned about the Won vs. the Yuan.
If I follow right, Korea is headed for a trade deficit this year, and in order to avoid that, the BOK is buying Won and attempting to raise its exchange rate? Does the BOK have any proof that the Won is being unnaturally devalued? If not, I have an uneasy feeling about this.
The BOK did this because the entire economy is export-led. Korea, like almost every small country, cannot benefit greatly from a strengthening of their currency. Foreign goods are artificially blocked by the government, so it won’t stand to benefit from the ability to import at greater volume with a stronger valuation.
Honestly, give the BOK some rope. They did this because it was the best reaction in the short run. Of course, in the long run, defending a currency rather than raising interest rates and just eating the revaluation is better, but defending the currency is a legitimate strategy if they anticipated a rebound in the world economy.
Furthermore, countries like Korea often become the whipping boy of investors and currency speculators in times of global crisis, as the initial shock leads to investors pulling money out of countries considered relatively more volatile. If you comparatively look at the percentage drop in stocks in the initial shock of the sub-prime mortgage and the first few oil shocks, non-European and non-Japanese markets got hit a lot harder than European, Japanese, and even American exchanges. Korea, despite it’s global position, is still considered a less than stable investment option in the world of global trade, for reasons that everyone speculates, but really doesn’t matter. If that is the case, defending the currency could also be viewed as a method of soft-landing the crash.
Also, I would like to add a brief disclaimer to #8’s post: The relationship between the fluctuation of a country’s trade balance and the strength of it’s currency is correlated but not in just one direction. One can cause the movement in the other. A weakened currency will lead to people buying more of a country’s goods as the relative price drops, leading to the trade balance to increase. A strengthened currency will lead people to buy less as the relative price increases, leading the trade balance to decrease.
If the BOK believes that long-term pressures will put the dollar over the cliff, then the smart thing to do is dump some of those dollars now while they can still get an appreciable pile of won in return.
If the dollar tanks completely, the world is screwed. It doesn’t matter what pile of money people have. We’re all going to hell in a handbasket.
# 12,
True. Since the establishment of the Brenton Woods System, the dollar has been the currency that drives the world economy. The rise of the Euro recently doesn’t change that. Actually, since most commodities (including oil) is traded in dollars, the decline in the dollar increases worldwide inflation.
Thus, a currency’s relation to the dollar is critical in determining how vulnerable a country is to inflation, a point that some ppl here appear to not recognize.
#12 Ghost.yoon hits the nail on the head.
The dollar tanking, or more exactly an outbreak of hyper-inflation, in which the US$ becomes dramatically devalued and fun effects like Americans using hundred dollar bills to buy chocolate bars and Brendon-types wearing signs around their neck “Will make contracts for food” begin to be seen, well, everyone is screwed. There is at the moment no safe harbor currency or alternative to the dollar that would fill the same functions as the US$ does now. The M2 money supply of Euro’s show that there aren’t enough Euro’s in the world to do that, the Chinese and Russian currencies are nowhere trusted and have convertibility problems, etc. Nothing right now can do what the dollar does, and if the dollar can’t do it, what then?
Imports to the US would collapse, setting off domino economic collapses or at least severe recessions in those countries that export heavily to the United States. Think about it: Thailand and South Korea’s currency mismanagement shook this region. What does that say about what a US$ plunge would do to the world?
http://www.blanchardonline.com.....he_Economy
This seems to be Morgan Stanley and the Bank of Scotland’s take on it too.
“Reagan proved that deficits don’t matter” - President Cheney, a few years ago. This man’s colossal incompetence is about to result in him having a front-row seat to the full-on pummelling of America courtesy of ‘financial reality.’
It would be nice to look forward to him admitting his responsibility during the upcoming recession, but being the decider apparently means never having to say you are sorry. You know we’ll be hearing lots of huffing and Limbaugh-like screeching on how the shattered American economy is Obama’s fault, later.
Those of us outside America can’t even look forward to enjoyably watching this all go down, since we’re going to go down the tubes too. Thanks George! Thanks GOP!
I know I’ll get beat up about this.
There’s still Ron Paul!
He’ll push for
No Income tax.
No Federal Reserve.
Less government spending/ Less government and more personal freedom and responsibility.
A return to the gold standard where savings aren’t stolen through inflation.
McCain - More War
Obama - More government services
Both equal more spending and possibly (probably) higher taxes. Because, you know, that’s what lights a fire in our economy…less money to spend or invest or save.
Also, Brendan’s comments about trading in while the trading’s good makes sense.
McCain has promised to balance the budget by taking an axe to Medicaid, Medicare and Social Security. Estimates are he’ll need to chop them by 1/3. If I wasn’t already planning to vote for him, this seals the deal for me. The runaway social entitlements are what’s busting the budget — not the relatively paltry (yes, paltry!) sums being expended on defense, no matter what they say in Northern California salons.
And an unnecessary war in Iraq had nothing to do with it?
$5.5 trillion to be exact. Five trillion!
http://zfacts.com/p/447.html
Christ, America has almost bankrupted itself over this war - and most of the money owed are to its enemies like China. If this isn’t a spectacular mismanagement of government, I don’t know what is.
Um, that “Iraq War Clock” doesn’t report the number US$5.5 trillion. You can read, can’t you?
According to my eyes, it says US$550 billion, one-tenth of what you’re claiming. And that’s a cumulative war cost, over a period of more than five years. So Iraq adds US$100 billion per year to the US government’s US$2.9 trillion budget. Factor in increased baseline defense spending (let’s say US$100 billion a year more than we were spending when Clinton left — just a wild guess) and defense constitutes 7-8% of the federal budget.
I always get frustrated with the left because its self-appointed spokesmen are such morons.
My bad mistake. Too many zeroes there.
Still, $500 billion is nothing to sneeze at. That certainly could have made a huge dent on cutting down American foreign debt.
That US$500 billion was spent over Fiscal Years 2003-2008 — six fiscal years during which the cumulative Federal budget totalled US$15,270 billion. We’re talking additional expenditure of about 3.2% over baseline here. (Plus, I expect your Iraq War Clock overstates things.)
By far, our problem lies not with the war, but with Section 8 housing, the War on Drugs, Medicare, Medicaid, and Social Security. So far, the “Smart Guy” has not offered much hint that he understands this point. McCain has.
Less Truthiness, more Factiness and I’d be much less crabby.
Go get ‘em Brendon!!
“Facts? Facts are meaningless! They can be used to prove anything.” -Homer Simpson
http://www.thenewyorkerstore.c.....By=popular
This is how BOK single-handedly started IMF crisis. These losers kept pumping dollars into the market to prop up Won.
Kept it up!
Finally, there was no more dollars. None. The exchange went up as high as 2000 won per dollar.
The situation is different now. However, these losers are trigger-happy. And, one day they wake up and find that there is no dollar reserve left.
Let the market take care of itself. The more you mess with it the worse it gets.
I encourage Americans to vote for the smart guy not because your President controls the economy (he doesn’t), but because he takes the lead in dealing with the outside world, a place which it would behoove more Americans to become familiar with, because this is increasingly where America’s economic and other decisions will be made.
America has many of the world’s brightest bankers and financial specialists. If they could get control of your Fed, it would be nice. If not, your dollar is in jeopardy. Either way, the President is pretty low on the list of people influencing the decisions.
The world’s economic power is becoming dispersed, though, becoming multipolar or even nonpolar. Many of the most’s powerful economic entities in the world are not states (the IMF, Toyota, the Bill&Melinda Gates Foundation, Warren Buffett, China’s SAFE, OPEC and a host of Gulf Coast SWF’s). And many of them are states that have been lending the US $600bil to $800 bil per year lately. America’s deficit is not being funded by private buyers of T-bills anymore. Your spending habits have been dependent upon the rulers of China, the Gulf, and Russia to buy your bonds. If they stop, demand for US bonds will drop. That means one of two things: either you stop spending so much, or you raise your interest rates so that investors will want your bonds again. Raising interest rates is a signal that hard times are coming. The BOK has been trying to avoid it by selling dollars. So has America (which makes its own dollars). Problem is, you made too many dollars. Devaluation or inflation must result. Russia, China and the Gulf don’t want devaluation, because they hold so many of your dollars. But they won’t fund you forever, so you need to really talk to each other. Intelligently.
The world stage has more actors on it now. It’s more complicated. America’s still the big guy, but its hand isn’t as strong as it used to be. I don’t say this with joy, because you’re still the best hope we have for a safe and prosperous world. But it’s more complicated now. Vote for the smart guy.
Weirdly the planets are aligned once more and I find myself in agreement with baduk.
Except that the Administration takes the lead in preparation of the budget.
he’s not a smart guy. He’s an eloquent guy.
Two are not the same.
Butt out, Canadians. I thought y’all were shopping south.
wjk,
Since the U.S. economy has such an effect on the global economy, other countries do have the right to speak their mind. We do, however, have every right to ignore them… but heck, we really shouldn’t.
It’s like us telling Saudi Arabia to spurt out more oil to increase supply, lower prices and stabilize the global economy. They have every right to ignore us also (which they do sometimes) but it’s nice when they do listen to us from time to time.
Great pie graph 1/2 way down the page showing combined discretionary/non-discretionary US spending 2007. Defence spending clocks in at 20%, which some might call ‘paltry’ and some ’significant.’ It’s a potato-poetahto thing.
http://en.wikipedia.org/wiki/I.....Y_2007.png
Brendon, I think you are in a can’t-lose situation, because it’s an excellent chance Medicare and Social Security will be slashed in the next 4-8 years no matter who is the president. Please reference the ‘full-on pummelling by financial reality’ paragraph for thoughts on this. Bring on the catfood for America’s grandparents and pliers-and-whiskey home dentistry for mom and the kids! Rah! (No need to import tired and huddled masses from abroad anymore, anyways. - hey, you’ve always got to try and look on the bright side.)
Breaking away to the original post article, I’ll put in my two cents that the Bank of Korea is intervening and strengthening the won simply to keep it in a desirable band or range, and this is a wait and see action. The near future is volatile - will oil go up or down? 20 different opinions. My opinion is that oil will stay high all summer as the northern hemisphere runs it’s aircons, retreat down to about 120 in the fall (a typical low season, when the northern hemisphere is not especially using it’s heaters or it’s air conditioners), and then continue it’s march up to and past 200 a barrel this winter.
Change your won to your home currency this fall.
#15 “A return to the gold standard where savings aren’t stolen through inflation.”
The gold standard was a good idea, but how could it ever be implemented again now? What’s that saying about the barn door and escaped horse?
The gold standard meant that the US government would redeem US dollars brought in by anyone with actual gold. That made the US currency as good as gold.
Since going off the standard, though, the US has been free to print as many dollars as it wanted. And it has. There isn’t enough bullion in the entire world to redeem what’s out there now. Ron Paul’s promise on this is as unrealistic as a bridge to England would be, and could never be implemented.
Doesn’t have to work that way, Johnson.
Gold could continue to trade on the market. The central bank monitors the market price for gold in its own currency (for simplicity, let’s say ‘the Fed’ and ‘the USD’). The Fed would announce that it will keep the USD valued within a certain narrow band, say between 98 and 102 USD per ounce.
When the market price of gold falls below 98USD, this indicates that the currency is too strong, and the Fed ‘releases’ more cash into the system by buying government bonds held by commercial banks (thereby giving the banks more cash to lend out into the economy, making USD’s more plentiful, and lowering their relative value). If the price of gold on the market rises above 102, the Fed takes this as a signal that the USD is undervalued, so it sells bonds to the commercial banks, thereby mopping up cash. Note that the Fed might have to raise interest rates to make these bonds more attractive and get the banks to buy them.
Ron Paul’s idea has many merits, but you are right that no government now in existence would go back to this system.
The ability to print money is just too much power for any government to give up, despite the attractiveness of the policy to economists.
Now that’s I’ve written this far, though, I’m too tired to explain what’s so great about fixing a nation’s currency to gold, and what is so destructive about fiat currency. I thought wiki or about.com might have good writeups to refer you to. Unfortunately, they don’t. I’ll have another look tomorrow.
this one’s not bad
http://www.econlib.org/library.....ndard.html
http://blogs.cfr.org/setser/20.....after-all/
Brad Setser (an American, if that helps to improve his credibility) has an excellent post on the dynamics of China providing
the biggest source of funding for the US deficit.
The Smart Guy voted yes today on the Medicare bill in the Senate while McCoward missed a vote again, forfeiting an opportunity make good on his promise to cut Medicare spending.
The Medicare bill to which you refer is a defeat for fiscal responsibility, so I am not surprised the Smart Guy say “Yes, We Can!” to bankrupting the nation. The bill passed with a veto-proof supermajority, so McCain’s vote, although symbolic, would not have contributed to his promise to cut Medicare spending.
Why don’t we just call McCain “The Old Guy”…?
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