In These New Times

Bloomberg

19th October, 2010

South Korea is preparing further measures to counter capital inflows triggered by low interest rates overseas as emerging market nations intensify the fight to restrain their currencies.

“We understand the problems from low interest rates around the world sparking capital flows to emerging countries,” Finance Minister Yoon Jeung Hyun said at a parliamentary audit in Seoul today. “We’re now preparing measures to cope with capital inflows, atop the recent limits on foreign-exchange derivatives trading.”

Nations from Brazil to Thailand and China are striving to restrain their currencies as investors seek higher-yielding emerging market assets amid near-zero U.S. borrowing costs. Capital flooding into Asia could lead to asset bubbles and financial instability, International Monetary Fund head Dominique Strauss-Kahn said Oct. 18.

South Korea’s planned steps can’t be announced yet as “we have to consider the changing conditions in global financial markets,” Yoon said at the audit.

The won slid 1 percent to 1,129.35 per dollar as of 1:33 p.m. in Seoul today, according to data compiled by Bloomberg, after Yoon told the lawmakers the authorities will act when “herd behavior” causes sudden moves in the currency.

The won has risen by 7.6 percent in the past three months, the second-best performer in non-Japan Asia, which may help to curb domestic inflation while threatening export competitiveness at firms such as Hyundai Motor Co., South Korea’s largest automaker.

“Currency War”

Brazil yesterday stepped up efforts to curb gains in the real by announcing an increase in inflow taxes, saying it may be forced to take additional measures as Finance Minister Guido Mantega called for an end to the worldwide “currency war.”

Thailand said last week it will remove a 15 percent tax exemption for foreigners on income from domestic bonds. South Korean regulators are due to start an audit of banks handling foreign-currency derivatives today.

The won has surged because of expectations of a second round of monetary easing by the U.S. and a prolonged currency “war” is a risk to Asia’s fourth-largest economy, Bank of Korea Governor Kim Choong Soo said during another audit by lawmakers yesterday.

G-20 Tension

The issue of currency policy may dominate the summit of the Group of 20economies in Seoul next month, which South Korea will be chairing. Japanese Prime Minister Naoto Kan signaled on Oct. 13 that South Korea, given its role at the meeting next month, should stop preventing its exchange rate from appreciating.

Japan’s finance minister today said there may have been a “misunderstanding” over his government’s stance on Chinese and South Korean currencies, a sign he’s seeking to ease tension over foreign-exchange policy ahead of G-20 meetings. Japan last month intervened for the first time in six years to restrain the yen and protect exporters.

The U.S. and Europe have been pressuring emerging-market nations to let their exchange rates appreciate to help rebalance demand in the global economy.

Singapore’s central bank last week signaled it will allow a faster gain in the island’s currency to curb inflation, even as its economy shrank last quarter. Sri Lanka said today it plans to ease foreign-exchange controls after the nation’s central bank left interest rates unchanged.

To contact the reporters on this story: Eunkyung Seo in Seoul ateseo3@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo atcanstey@bloomberg.net