Foreign exchange authorities strongly intervene amid surge in won/dollar exchange rate… warn of 'speculative trading'

Foreign exchange authorities have launched an all-out effort to stabilize the market, mobilizing verbal intervention and even reactivating the National Pension Service's currency hedging to calm the sharp rise in the won/dollar exchange rate.

The Bank of Korea and the Ministry of Finance and Economy issued a joint press notice at 11:45 a.m. on the 8th, assessing that recent exchange rate movements have become excessively volatile due to the influence of speculative transactions, such as offshore non-deliverable forwards (NDFs), in addition to simple foreign currency supply and demand. The two institutions delivered a strong warning message, stating that they would not tolerate excessive volatility or one-sided bias relative to fundamentals. This marks the first joint message from director-level officials of the Bank of Korea and the Ministry of Finance and Economy in six months, since December 24 of last year.

On this day, the won/dollar exchange rate in the Seoul foreign exchange market surpassed 1,555 won in early trading, reaching its highest level since the financial crisis. Concerns also emerged in the market that the rate could fall to the 1,600 won level. Although a policy to strictly crack down on speculative trading was confirmed at the emergency market review meeting—the so-called F4 meeting—held the previous day by Deputy Prime Minister and Minister of Finance and Economy Koo Yun-chul, Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Won-geon, and Financial Supervisory Service Governor Lee Chan-jin, exchange rate instability persisted due to a combination of a strong dollar driven by expectations of a U.S. policy interest rate hike and dampened investor sentiment in the stock market.

Authorities appear to attribute the recent rise in the exchange rate more to increased speculative betting than to the outflow of foreign capital itself. This stance is based on the assessment that foreign investors' selling of domestic stocks has largely entered its final stages, and that foreign ownership in major semiconductor stocks has already significantly decreased. Instead, they are wary of the so-called "tail wagging the dog" phenomenon, where high exchange rates formed in the offshore NDF market influence the domestic spot market. Accordingly, it is reported that authorities are reviewing institutional supplementary measures to enhance the transparency of NDF transactions and encourage some trading to be directed to the domestic DF market.

Authorities have also stepped in directly to manage supply and demand. They believe that while domestic foreign currency liquidity itself is not insufficient, some export companies are exacerbating market imbalances by holding onto dollars instead of immediately converting them into won. They plan to inspect market participants, such as foreign exchange banks, for disruptive activities through written inspections and encourage them to increase the exchange of export proceeds. On the same day, the National Pension Service reportedly resumed currency hedging, which had been suspended since the beginning of the year, by engaging in forward exchange sales. This measure is in accordance with the so-called "New Framework" jointly established by the Bank of Korea, the Ministry of Finance and Economy, the Ministry of Health and Welfare, and the National Pension Service. With these overlapping responses, the sharp upward trend in the exchange rate subsided somewhat, with the rate falling below 1,530 won during night trading.

However, the market believes it will be difficult for the exchange rate to immediately enter a stabilization phase. This is because external variables that are difficult for domestic authorities to control, such as U.S. monetary policy, the situation in the Middle East, and foreign capital flows, continue to exert a strong influence. Seo Jeong-hoon, a senior research fellow at Hana Bank, viewed that while intervention by authorities serves as a warning to speculative forces, its stabilizing effect may be limited, suggesting that the exchange rate is likely to fluctuate between 1,520 and 1,560 won for the time being. Moon Jeong-hee, an economist at KB Kookmin Bank, also assessed that upward pressure on the exchange rate is more dominant, considering strong U.S. employment figures and next week's Federal Open Market Committee (FOMC) meeting. This trend indicates that even if the immediate crisis has been averted in the short term, there is a possibility that exchange rate instability could intensify again if external conditions do not change.