South Korean Authorities to Stem `Excessive' Won Drop

By William Sim and Bomi Lim

July 7 (Bloomberg) -- South Korea authorities will work to halt ``excessive'' moves in the won, Asia's second-biggest declining currency this year, including using foreign-exchange reserves to stem its drop.

The won climbed 1.1 percent to 1,038.30 per dollar at 9:48 a.m. in Seoul after the finance ministry and Bank of Korea issued statements today addressing their concern over the currency's more than 10 percent decline in 2008. ``We'll take stern action if necessary when the market imbalance becomes excessive,'' the ministry said in Gwacheon.

``It is urgent to restore credibility in the market,'' Ahn Byung Chan, director-general of the central bank's international bureau, told reporters. ``Perceptions in the market are not in line with the government's intention.''

Asia's economies were crippled by a currency crisis a decade ago when Thailand's devaluation of the baht prompted investors to pull money from the region. Countries including Indonesia, Thailand and South Korea spent most of their foreign reserves to prop up their exchange rates and had to borrow more than $100 billion from the International Monetary Fund.

``Authorities are concerned about the foreign-exchange market moving in only one direction too much,'' the finance ministry said in today's statement.

South Korea's won 10.2 percent drop this year is second only to an 11.7 percent slump in the Thai baht, according to Bloomberg data. A declining won has exacerbated the nation's inflation pressures by making imports more expensive.

Consumer prices in South Korea surged 5.5 percent in June from a year earlier, the biggest increase in a decade and exceeding the central bank's target for an eighth straight month.

`Top Priority'

``The government has set top priority on stabilizing inflation and we will have to manage the foreign-exchange market to meet that goal,'' said Choi Jong Ku, head of the ministry's international finance bureau. ``We will use foreign-exchange reserves again if necessary'' to curb the won's decline, he said.

Asia's policy makers have accumulated foreign-exchange reserves since the 1997 crisis. South Korea had $258 billion in reserves at the end of June, the sixth-highest in the world, trailing only China, Japan, Russia, India and Taiwan.

Financial authorities bought $7 billion of won since the end of May to help support the currency, the JoongAng Ilbo newspaper reported on July 1.

``Policy makers are trying to suppress a rise in import prices by intervening in the foreign-exchange market,'' said Chun Chong Woo, an economist at SC First Bank Korea Ltd. in Seoul.

No Crisis

Bank of Korea Deputy Governor Rhee Gwang-Ju, in a July 2 interview, said this year's decline in Asian currencies doesn't signal a repeat of the region's 1997 crisis.

Those comments were echoed by Asian Development Bank President Haruhiko Kuroda. ``I don't think currencies in the region would be under significant pressure in the coming months or years,'' he said in Tokyo last week.

Finance ministers from 13 Asian nations, including South Korea, Japan and China, agreed in May to create a pool of at least $80 billion in foreign-exchange reserves to be tapped by nations in case they need to protect their currencies. That was an expansion of the so-called Chiang Mai Initiative under which pairs of nations would lend each other money at favorable terms if help is needed to support their exchange rates.

``I don't think any of them would request IMF or Chiang Mai Initiative supports,'' Kuroda said on July 4.

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Bomi Lim in Seoul at blim30@bloomberg.net.