Foreign exchange dealers in South Korea went on strike yesterday to protest against government intervention in the money market. Banks continued to process transactions for corporate and commercial purposes but dealers refused to trade in the currency - reflected in a fall in foreign exchange activity to US$1.2 billion from an average $2 billion. Brokers said 30 traders at Korean and foreign banks began the strike after holding a meeting to discuss action. Analysts said the dealers believed the government's interventions in the market - aimed at keeping a lid on the won's appreciation - were too frequent and controlling. As a result trading bands had narrowed, making it difficult to make a profit. Some observers said it was largely a symbolic act. 'I don't take it too seriously,' said a Korean bond trader at CLSA Global Emerging Markets. However, the government could take the protest seriously if it becomes concerned over diminished liquidity in the won. 'Since intervention is usually to prevent the won from strengthening, any change in the current intervention policy would tend to strengthen the currency,' said an economist with Bank of America. Like Japan, Korea fears that a strong currency could undermine its economic recovery by making exports too expensive. Its only other recourse is to raise interest rates - an unlikely move considering the number of corporates still struggling under heavy debt loads. Credit Suisse First Boston economist Tao Dong said he sympathised with the government's concerns and believed currency intervention was a valid central bank prerogative. However, he is concerned that frequent reliance on intervention has too many risks. 'Prolonged intervention weakens the signal from the market. For instance, continued intervention by the Bank of Thailand eventually masked the structural weakness of the Thai economy in 1997,' Mr Tao said. Mr Tao's second concern is more practical. He said Korea was seeing growing inflationary pressure and a stronger won could offset some of that pressure. 'Appreciation would help ease inflationary pressure. Then they would not have to raise rates which would be harmful at this point,' he said. Similar points were reportedly made by the protesting brokers. 'They said limited fluctuations in the currency will undermine corporate perception of risk . . . that corporates will believe the currency is fully stabilised,' one banker said. However, he said the market was sceptical that the money dealers were really more concerned with their good rather than the larger corporate good. 'Most think they're just greedy,' he said. Graphic: grap26gbz
