Analysis: Time for single Asian currency?

SEOUL, July 11 (UPI) -- Alarmed by a rapid surge in the won against the U.S. dollar, South Korean economists are calling on their country to make aggressive efforts to create a common currency in Asia, similar to the euro, to prevent financial turmoil.

South Korea has currency swap deals with several Asian neighbors aimed at heading off currency fluctuations, but economists here say these arrangements are not enough. Asian countries remain exposed to the risk of a rapid drop in the dollar, which could jeopardize the region's economic recovery prospects, they say.

"A more fundamental measure is needed to avoid the fallout from the U.S. and other overseas markets," said Choi Gong-pil, a researcher at the Korea Institute of Finance. "That is the establishment of an independent regional capital market in Asia and its single currency," he said.

"Total foreign exchange reserves of four major Asian countries -- South Korea, Japan, China and Taiwan -- reach $1 trillion, and they have enough strong economic foundation to create their own capital market," Choi said. South Korea's foreign currency reserves rose to a record $112.4 billion as of the end of June, which ranks fourth in the world, the central Bank of Korea said.

South Korea has established a web of central bank swap agreements to avoid a repeat of a regionwide crisis. It has currency swap deals with Japan ($2 billion), China ($2 billion) and Thailand ($1 billion). The Bank of Korea is also in talks with counterparts from the Philippines and Malaysia.

The deals represent efforts by Asian countries, which suffered an unprecedented financial meltdown in 1997-1998, which helped them strengthen financial cooperation in the region. Economists say one of the main causes of the Asian financial crisis was the dwindling supply of U.S. dollar reserves held by the Asian countries.

But in the regional swap network, a country which faces speculative attacks on its currency, like the Thai baht in 1997, or shortage of funds during a balance of payments crisis, could borrow the dollars from its partners.

The arrangement is part of the Chiang Mai Initiative, which aims to forge closer ties by creating a network of currency swaps among the Association of Southeast Asian Nations plus Japan, China and South Korea. Japan, a driving force behind the CMI, with the world's biggest foreign exchange reserves, has bilateral swap agreements with South Korea, Thailand, the Philippines and Malaysia.

In another move to cope with potential financial turmoil, the Asian Development Bank is working on developing an early crisis warning system. South Korea, Indonesia and several other Asian nations are also considering launching a new system to better track money laundering, Seoul's Finance Ministry said. South Korea will share information on money laundering with other Asian countries, it said.

"But such measures can hardly bring about fundamental resolution of won-dollar exchange rate fluctuation risk," said Ryu Jong-il, an economist at the Korea Development Institute, a government think tank.

"Establishing a common Asian currency is necessary to regional economic cooperation and financial stability," he said. "The introduction of a common currency basket could be the very first step toward this goal."

The calls for a common Asian currency came as South Korea is facing a major challenge to its export-dependent economy.

The dollar fell to a 20-month low against the won Wednesday, which triggered intervention by the Bank of Korea for fear that a strong won will take the steam out of the South Korean recovery.

The greenback plunged below 1,200 won Monday in a near-panic response to remarks by Lee Ki-ho, a senior economic adviser to President Kim Dae-jung, that the foreign exchange rate would be left to market principles. The won further rose Thursday, closing at 1,179.5 against the dollar.

During the past three months, the Korean currency gained about 12 percent against the U.S. dollar. Economists and officials say that the surge in the value of the won is inevitable because the rise comes from the weakening U.S. dollar caused by market failure in the United States in the aftermath of the Enron and WorldCom scandals and other financial irregularities there.

South Korea's new government policy could further support capital flows into the country, which will lead to the stronger won. The Finance and Economy Ministry said Monday that it would provide tax incentives to lure more foreign investment in a bid to boost its credentials as an Asian business hub.

Facing growing concerns that the rising won would hurt South Korea's lifeblood of exports and stifles economic recovery, the government has decided to intervene in the foreign exchange market by selling foreign exchange stabilization bonds in a bid to secure more local currency for dollar purchases.

"The government is concerned about the effect the stronger won will have on the economy," said Kwon Tae-shin, international finance bureau chief at the Ministry of Finance and Economy.

But many currency dealers say the government measures can hardly stop the won's upward march. "The government is unlikely to take steps to force a reversal in the current trend," said Lee Sung-kwon of Good Morning Securities.

The Korea International Trade Association said a 10 percent rise in the value of the won to the dollar tends to cut South Korea's exports by $2.2 billion and increase imports by $7.94 billion, resulting in a trade balance setback of $10.14 billion annually.

"The simultaneous strengthening of the Japanese yen against the dollar is a great comfort to Korean exporters, but the won's surge is feared to deal a serious blow to Korea's trade balance," it said.

A senior Finance Ministry official said he is uncomfortable with the rapid pace of the won's appreciation because the country's exports have only recently started to recover after falling for 13 consecutive months through March this year.

Hyundai Motor Co. said it would be inevitable to raise overseas prices of vehicles.

The state-run Korea Institute of Economic Policy estimated the appropriate level of the won to the dollar at 1,235.