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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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May 20, 2005


South Korea: Never Mind

Boy, you have to stay alert to keep up with the Korean government's thoughts on its foreign exchange policies.  Brad Setser and Daniel Drezner both report (here and here) on this from the Financial Times:

The Bank of Korea on Thursday backtracked on its comments that it did not plan to intervene further in the foreign exchange markets, after precipitating a sharp fall in the US dollar overnight.

Currency traders said it appeared that the central bank in fact bought dollar-denominated assets on Thursday morning, less than 24 hours after Park Seung, the governor, told the Financial Times that he did not “anticipate” doing so...

Mr Park’s comments pushed the won up sharply against the dollar in US trading on Wednesday, and it hit 999.5 immediately after the local market opened on Thursday but shortly fell back below the psychologically-important 1,000 mark to close at 1,005.

The central bank on Thursday confirmed that Mr Park had been quoted accurately but it nevertheless released a statement saying that he had been “misunderstood.”

“The Bank of Korea will take necessary measures whenever the currency markets are unstable. Especially, we will not sit idly by if speculative funds come in to exploit a groundless news report,” it said.

Brad asks "what's going on?", and then answers his own question by suggesting that the central bank and the Ministry of Finance are pursuing fundamentally different policies.  Drezner concurs:

... there's no way, especially after the February episode, that Park didn't know what the effect of his interview would be on the currency markets.

Maybe, but this wouldn't exactly be the first ever trial balloon floated by a policymaker trying to alter the course of policy, would it?  I'm not sure why we shouldn't take the Ministry of Finance at its word:

Even Han Duck-soo, finance minister, last month said that reserves of about $200bn “may be adequate” for South Korea. But on Thursday Mr Han said Korean authorities would continue taking action when the foreign exchange market showed any instability.

“When we see speculative forces and excessive volatility, we will act together with the Bank of Korea through smoothing operations,” he told reporters on the sidelines of a conference in Seoul.

I've said it many times:  "Taking action when the foreign exchange markets showed any instability"  is what central bankers do, even if reluctantly. The real mystery here is how the unwinding of the reserve accumulation the Koreans clearly desire can be accomplished on the terms they wish.

UPDATE: Global Trader's Diary senses a bureaucratic foul-up.  Whatever it was, this is a fair concern:

Probably doesn't mean much over the short-run as traders will just be left ignoring all comments. In the long-run the loss of credibility could really limit the bank's options.

May 20, 2005 in Asia , Exchange Rates and the Dollar | Permalink

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Listed below are links to blogs that reference South Korea: Never Mind :

» Daily Linklets from Simon World
A Japanese blogger gets a lot of links, South Korea has no organized crime, China will no longer have human dishes, Pakistan is a globalization leader, Mongolia is a democracy, Syria is shrinking, and more, all on today's Daily Linklets [Read More]

Tracked on May 22, 2005 4:34:25 PM

Comments

What's your opinion of the South Korean position(s)?

Posted by: Movie Guy | May 20, 2005 at 02:37 PM

MG --
This is going to seem wimpy to the extreme, but I think I ought to avoid that question. Although I try to be as clear as possible that on this blog I speak for nobody but myself, the fact is that everyone knows my day job. My employers would be justifiably annoyed if I either condoned or criticized the decisions of another central bank. Prudence requires my silence on this one.

Posted by: Dave Altig | May 20, 2005 at 08:07 PM

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