Calm urged amid won's freefall against dollar

By Lee Joon-seung

SEOUL, Oct. 7 (Yonhap) -- South Korea's finance minister urged participants in the local currency market Tuesday to respond "rationally" to sharp fluctuations of the won's value against the U.S. dollar.

The call came after the Korean currency nosedived by 59.1 won to 1,328.1 won
against the greenback, raising concerns over a financial crisis.
"There is no need for market participants to panic over short-term fluctuations,"
Finance Minister Kang Man-soo told lawmakers during a parliamentary audit
session.
"The depreciation of the South Korean won is inevitable because overall
conditions are very difficult, but if things stabilize the exchange rate may head
in the opposite direction," he said.
The value of the Korean won against the greenback has been so volatile because
the country's trade balance switched to a deficit of over US$14.24 billion in the
first nine months of this year from a surplus in 2007, the minister said.
Also responsible is the outflow of foreign funds invested in South Korean bonds,
he said.
Kang added that South Korea, Japan and China are making arrangements to head off
any foreign exchange crisis at the ministerial level, but did not elaborate.
An alliance of the three countries, that between them hold huge foreign reserves,
could effectively thwart attempts by speculators to make profits by manipulating
exchange rates.
The policymaker then said that the difficult times required Seoul to immediately
implement and expand tax cuts that could help consumer spending. He stressed that
despite criticism, the Lee Myung-bak administration is committed to easing the
comprehensive real-estate holding tax.
"There is no such tax anywhere in the world," he said, making clear that the
government will push for changes that have received flak for solely benefiting
the rich.
Concerning the won's tumble, Deputy Finance Minister Shin Je-yoon told reporters
later in the day that financial regulators are looking into possible market
distortions.
"A probe is needed because the market is reacting to external changes beyond what
would seem normal," the official said, hinting that currency speculation forces
may be at work.
Shin said the local currency will likely firm up against the greenback once the
country starts to post a trade surplus this month.
The government expects the nation's trade balance to revert to a surplus in the
fourth quarter, reducing the yearly deficit to around $6 billion.
The deputy minister, meanwhile, said reports by foreign media companies about
excessive debts incurred by South Korean companies and banks were exaggerations.
"Following the 1997-98 Asian financial crisis, local companies and banks reduced
their overall debts and loan-to-deposit ratios to acceptable levels," he
stressed.
On future contingency measures to stem rapid fluctuations of the local currency,
the official said there was a need to balance out appropriate intervention and
preserve the foreign reserves.
He said if the situation becomes critical, Seoul may consider controlling capital
flow.
An injection of $10 billion from the nation's dollar reserves into the foreign
exchange swap market has also been suggested to address a possible liquidity
crunch.