The won weakened to W1,290 against the U.S. dollar at one point during Monday’s trade, only to close at W1,269 after verbal intervention by forex authorities. The Korean currency has weakened 14.7 percent against the U.S. dollar since Lehman Brothers’ bankruptcy on Sep. 15. This is because of a shortage of dollars. Foreign investors sold W14.7 billion (US$1=W1,269) worth of Korean stocks on the Korea Exchange over the past four months and used that money to buy up dollars and remit them overseas. Dollar demand has also risen among Korean importers, including oil refiners, due to soaring crude and raw materials prices.

By contrast, Korean exporters are hoarding dollars they made by selling their products overseas because it is more profitable for them to hang on to their earnings as the greenback strengthens. They are also worried about the difficulties they may face in buying back dollars later if they sell them now. With hardly anyone seeking to sell dollars and plenty of buyers on the market, it is inevitable that the won weakens.

Thirsty for dollars, banks have practically stopped extending dollar loans while cutting down on purchases of export bills of exchange and other trade financing operations. As a result, small and medium-sized companies are in a bind, unable to get their hands on dollars to pay for raw materials to manufacture products even though they have won export orders from abroad. The government has injected $10 billion from its foreign exchange stabilization fund and decided to offer an additional $5 billion in support through the Export-Import Bank of Korea, but the dollar drought is not being resolved. That is why Kang told the bank heads to use all means to secure dollars.

The problem is that we are not the only ones who have a hard time securing dollars. This is happening around the world. Recently, three-, six- and 12-month deals have almost disappeared in the global financial markets, while only one-day deals are taking place. Due to uncertainty about the future, banks with ample dollar reserves are refraining from investing them to make interest gains. The situation is so severe that many are worried that the settlement of funds, which is the primary role of banks, has been paralyzed, and the financial system may be breaking down. The central banks of the U.S, Europe, Japan and the U.K. are injecting hundreds of billions of dollars in short-term funding just to enable money markets to barely remain operating.

In contrast to the stagnant global financial market, the market for U.S. Treasury bonds is overflowing with money. The yield on three-month Treasury bonds fell to 0.47 percent. The yield on two-year Treasury bonds is no higher than 1.58 percent. If inflation is factored in, the profit margin is negligible and investor may even incur losses. Yet global investors are parking their cash in U.S. Treasury bonds, saying all they need is to have their principal well protected. Investors apparently believe there is no way that sovereign bonds issued by the world’s largest economy will become insolvent.

There is little chance that the credit crunch in the U.S. and European markets will be eased any time soon. A $700 billion financial bailout package has been approved by the U.S. government, but it is expected to take six weeks until the actual money is injected into the market. And even after that, it will be difficult for international financial markets to return to normal immediately. We must brace ourselves for tougher times ahead as we deal with a dollar shortage for the time being.

We need to come up with separate measures to deal with the drastic weakening of the won against the dollar. The strengthening of greenback is a global phenomenon that has resulted from this financial crisis. Following Lehman Brothers’ bankruptcy, most currencies including the euro have weakened between 2 and 7 percent against the dollar. But the won has weakened more than 14 percent, not only against the dollar but against most other major currencies.

We do not face an especially bad foreign exchange situation compared to other countries. The spread on forex stabilization bonds issued by Korea has risen by a smaller margin than those issued by other Asian countries, which shows that foreign investors view Korea as less of a risk than other countries.

But the reason the won has weakened so much more than other currencies is that financial institutions and companies are overreacting. Even until October of last year, Korean exporters were unloading dollars into the currency market in forward exchange deals. That strengthened the won drastically against the dollar, to the point where it fell to the W900 level. The KIKO (knock-in knock-out) currency option product was devised under these circumstances. Individual businesses stood to gain by signing up for KIKO, but in the end everyone lost. Now, the exact opposite is happening: everyone is buying up dollars and adding a different burden on the economy. It is time for the government, financial institutions and businesses get together to solve the liquidity problem.