The Korean currency is strengthening fast, pushing the exchange rate to below the level of 1,100 won per U.S. dollar. In the past, such a rapid gain would have invited intervention immediately. A strong won was an anathema to top Korean economic policymakers, who wanted to generate high rates of growth by promoting exports.
But the government does not even hint at intervening in the market, be it verbally or actually, giving the impression that it is tolerating a strong won as an antidote to inflation. If so, it is doing the right thing. Inflation is serious.
Last month, consumer prices gained 4.7 percent year-on-year, the highest since October 2008. It was the third consecutive month in which the consumer price index was higher than 4 percent. No wonder the government appears to be attempting to curb inflation by allowing the won to appreciate ― a departure from the past policy of promoting exports by keeping the won weak.
The presumed change in foreign exchange policy is not likely to have any serious backlash, given a surge in exports last month. The March shipments were posted at $48.6 billion, up 30.3 percent from a year ago. Imports stood at $44.5 billion, producing a monthly trade surplus of $3.1 billion.
But high prices are hurting consumers, in particular those in low-income brackets. Of the 80 items whose price changes are monitored by the Korea Consumer Agency, more than 50 have gained in price this year. The consumer discontent is reflected in a recent poll, in which 63 percent of the respondents said they were worse off now than when President Lee Myung-bak was inaugurated three years ago.
A strong won is undoubtedly a forceful tool with which to fight inflation. But it will be even more effective when it works with a raise in the central bank’s benchmark rate.