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The rapid depreciation of the greenback against the Korean won is estimated to have lost the nation some W4 trillion (US$4 billion) this year in the value of its foreign currency reserves, which are mostly in U.S. dollars.
That means 3 percent of the budget for the year (W145 trillion) has vanished in just 15 days. Losses are likely to mount as economic think tanks say the dollar will continue to fall.
As of late 2005, 65 percent of the nations¡¯ currency reserves of US$210.4 billion was estimated to be in dollar assets, meaning loss on evaluation was some W3.98 trillion since Jan.1.
Since the 1997 financial crisis, the focus of Korea¡¯s foreign currency policy has been on securing enough foreign currency reserves to improve the nation¡¯s credit abroad, a Finance Ministry official says.
But Korea¡¯s foreign currency reserves are the fourth largest in the world after Japan, China and Taiwan -- way too much, critics argue, and making big losses inevitable in an era of a weakening dollar.
A recent report by the Korea Chamber of Commerce and Industry sets appropriate reserves given Korea¡¯s economic size at $68 billion or three months worth of imports.
But as of late 2005, Korea had as much as $142.4 billion in U.S. dollars, the report says. In other words, the country suffered W2.69 trillion in loss on evaluation unnecessarily. The government itself admits that reserves are far too big. Former finance minister Lee Hun-jai, speaking in the National Assembly late in 2004 when reserves stood at $200 billion, said that was appropriate combining reserves of $150 billion plus another $50 billion for reunification.
The dollar is expected to fall as far as W960 and hover between W970 and W980 in the first quarter of 2006 before sliding a little further, a researcher with the Samsung Economic Research Institute says. The LG Economic Research Institute has adjusted its forecast for the dollar exchange rate from W1,005 last October to W990 and is discussing whether to make further downward adjustments.
But Korea cannot just cast off its dollar assets, Bank of Korea Assistant Governor Lee Young-gyun argues. ¡°If we change the percentage of dollar assets in the nation¡¯s foreign currency reserves every time the dollar falls or rises against the won, it will have a negative impact on the global financial market,¡± he says.
(englishnews@chosun.com )
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