–The Euro...The New World Currency?
 

Another Currency Crisis
The Korea Times

A global currency war is looming. The United States has made it clear that it will allow the dollar to slide for the foreseeable future to stem the ballooning fiscal and trade deficits. This means the world's largest economy will continue to live beyond its means, pushing ahead with tax cuts and heavy military spending by eating into the export incomes of its trading partners. President Bush's commitment to a strong-dollar policy may prove to be lip service for the summit.
This will inevitably lead to a head-on collision with Europe and Asia, both of which believe Washington should first rectify its twin deficits as a slump in the greenback would trigger confusion in international currency markets and slow global growth. But there is little chance that Bush will change his domestic and foreign policy agenda, and major economies will be forced to keep their respective currencies weak. And if China decides to float the yuan, the won-dollar parity rate will fall below 1,000.

There is even speculation about something similar to the Plaza Accord of 1985, through which the Japanese yen was forced to double its value against the U.S. dollar. But an export-driven and relatively isolated economy like Korea's would be hit hardest by such a development. While Japanese companies survived the drastic currency appreciation thanks to painful restructuring and superior technology, it is unclear how many Korean firms would be able to do that.

In a worst-case scenario, Korea may face a currency crisis on the scale of that of 1997-98, but for exactly the opposite reason. Seven years ago, the sudden and massive outflow of dollars and Seoul's futile attempt to defend its currency drove the nation into near bankruptcy. Now Korea has the world's fourth-largest foreign exchange reserves but still struggles to keep its currency from rising too high to protect the export industry, the sole engine of growth.

Financial officials find themselves in a dilemma. They can neither actively intervene in the currency market nor sit idle. Meddling in the market to reverse the global trend is not just unwise but also impossible. Government intervention should be limited to adjusting the tempo of the won's rise, soothing market sentiment and fighting possible currency speculation. Seoul may be able to use this occasion to weed out marginal exporters, but not as a large group. So the government needs to provide more protection from foreign exchange risks.

In the longer term, government support should be directed toward improving the competitiveness of the export industry in terms of not price but quality and technology. If Korean companies cannot survive global competition under a three-digit won-dollar exchange rate, the nation should not dream of joining the ranks of the industrialized countries. Seoul should make the most of the looming currency war to strengthen local industry so it cannot be swayed by currency volatility.