The competition to secure U.S. dollars as a safe asset is said to be taking place worldwide, but the recent phenomenon of the skyrocketing won-dollar exchange rate cannot be viewed as normal. Irrational and abnormal market currents must be normalized. This is the responsibility of both the policy authorities and the market participants.

As other causes for the rapid rise of the exchange rate in Korea besides the global financial blockage, one could list the current account deficit, the intervention of speculative capital and the trauma of the foreign exchange crisis. Among these, the biggest problem seems to be a psychological uneasiness bordering on panic. Because of fears resulting from the experience of the foreign exchange crisis, enterprises and financial institutions are not releasing their dollars, and by the law of supply and demand, the cost of the dollar shoots up more day after day. If it was an awkward obtuseness that brought about the exchange crisis, it is a panicky sensitivity that is now paralyzing the market.

In a nation with the world’s sixth largest foreign reserves, in excess of US$200 billion, it is foolish for everyone to assume an unlikely worst-case scenario and act accordingly. It is urgent that people adopt a stance of dispassionate judgment without lapsing into psychological panic. Rather than making rash countermeasures, the authorities need to provide accurate information to the market promptly and take a position of seeking real communication with the market. A ceremonial and unidirectional response disconnected from the market is useless and can instead breed mistrust. The responsibility for preventing a “self-fulfilling crisis” is with the authorities.

To the extent that some fictitious demand and speculative elements regarding foreign currency are aggravating the situation, the government needs to provide thorough monitoring and oversight of this. Whether or not the international balance of payments improves will be an important variable in psychological stability. The government should inform the market of developments in importation and exportation as needed and realize a shift to a surplus through the stimulation of exports and the controlling of imports.

The deepening of financial uncertainty even as the governments of other nations around the world have presented powerful stabilization plans such as the expansion of depositor protection and the lowering of interest rates shows the limitations of the individual nation unit. It is anticipated that policy coordination for market stability will be realized in some form or another at an International Monetary Fund and World Bank annual meeting being held this week in Washington with the participation of finance ministers and central bank heads from various nations. The South Korean government needs to demonstrate its diplomatic ability in securing foreign currency liquidity.

With movements around the world to lower interest rates and concerns about an economic slump, voices for the lowering of interest rates are also emerging. But because the lowering of interest rates has a negative effect on the exchange rate and the price of goods, prudence is required. However, it is necessary to provide enough liquidity that won capital does not become blocked.

Please direct questions or comments to [englishhani@hani.co.kr]