South Korea's Central Bank Rocks the Boat....Again

It seems as if the central bank of South Korea just doesn't get it (or maybe they do--as Matt and I have discussed before--see our comments here). Last week the South Korean Central Bank signaled that it might stop intervening in currency markets, noting that it was now comfortable with its currency reserves. Here is the specific quote in question:

"I believe that we now have sufficient reserves to secure our sovereign credibility so I do not anticipate increasing the amount of foreign reserves further," Park was quoted as saying."

"We now need to take more consideration of profitability and I think we're at a stage where we need to manage our reserves in a more useful way."

Although Park made no explicit comment on the won, the remarks were taken to imply that South Korea was now unwilling to undertake the intervention required to stem its currency's rise.

'Shockingly', this move precipitated a sharp rise in the won against the dollar. Later, the Central Bank denied the report, noting that "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."

Now there are a few ways to look at this (as noted here). Either the Central Banks are playing a game of brinksmanship with the US, rocking the boat just enough to get action that they see as necessary (i.e. reduction of the US current account and budget deficit, an increase in the value of the dollar, etc.), they are incompetent to some degree, or they are trying their darndest to balance the need to rationally adjust policy with the risk of sending the wrong signals to the international markets. I am partial to the third option, although I am becoming increasingly interested in the possibility of the first as a viable strategy (and an empirical reality)...

Filed as: Political Economy, South Korea, United States