IMF Questions South Korea’s Currency Policy
January 24, 2014 Leave a comment
IMF Questions South Korea’s Currency Policy
IAN TALLEY
Jan. 22, 2014 6:17 p.m. ET
WASHINGTON—The International Monetary Fund on Wednesday questioned South Korea’s currency policy, telling Seoul that it should only intervene in exchange-rate markets to prevent volatility that might damage the economy.
The unusually explicit scrutiny of Korea’s currency policy comes after Bank of Korea’s top official indicated early this year the central bank is ready to intervene in currency markets to curb the won’s strength. It also follows U.S. criticism late last year in which the Treasury Department said it was concerned that Korea had resumed currency intervention and needed to be more transparent about its activities.
“The won should continue to be market determined, with intervention limited to smoothing disorderly market conditions,” the IMF’s executive board said in a statement on the annual review of the country’s economy.
The fund says the won is “moderately undervalued,” accounting for inflation, but the currency is coming under increased appreciation pressure by markets as the emerging market outperforms many of its peers.
Korean officials say their efforts are meant to stabilize markets. But some U.S. economists say Korea wants to keep a lid on the value of the exchange rate to bar exports from becoming too expensive.
Although countries can devalue their currency by buying foreign currency, it comes at the expense of other countries’ exchange rates rising and can fuel trade and political tensions between governments.
To avoid creating friction over currency policies, the IMF said, Korea should be more candid about its exchange rate operations.
IMF directors “considered that increased transparency in interventions would help enhance the credibility of the authorities’ exchange rate policy,” the fund said.
The executive board appeared to be divided, however, about whether the country should continue to build up foreign currency buffers to protect against potential economic crises.
“Some directors considered that the current level of reserves is adequate and does not warrant further accumulation, while a few others, noting the proven benefits of building a strong buffer in past crises, cautioned against prejudging the case,” the board said.
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