Key Takeaways:
South Korea's emergency crackdown on offshore forex speculation drove the won 1.6% higher Monday after the currency opened at its weakest level since the 2008 global financial crisis.
South Korea summoned domestic and foreign banks Monday and vowed to crack down on offshore NDF speculation after the won slid to 1,555.2 per dollar, its weakest opening since the 2009 global financial crisis.
"The measures appear to temporarily cool overheated dollar-long positioning, but whether the rebound can be sustained remains uncertain," said Gyeong-won Min, an economist at Woori Bank in Seoul.
The won closed at 1,535.0 per dollar, up 1.3% from the open, after the Financial Services Commission summoned commercial and foreign bank branches in a meeting led by Secretary-General Shin Jin-chang. The authorities said they would scrutinize offshore non-deliverable forward transactions for speculative activity and review measures to absorb NDF trading into the domestic market. South Korea's National Pension Service was also conducting forex hedging operations to support the currency, according to people familiar with the matter.
The intervention marks South Korea's most aggressive defense of the won in more than a decade, as the currency has been battered by global fund outflows from local equities, uncertainty over a potential trade deal with the US and rising energy costs linked to Middle East tensions. Analysts warned the rebound may prove short-lived, with Min flagging the possibility of the dollar-won rate breaching 1,600.
The government said it would work with the Bank of Korea and the Financial Supervisory Service to investigate whether speculative moves or market-disrupting acts have exacerbated the won's decline, warning of strict penalties for violations. Regulators will also review whether importers and exporters have profited from the weaker won by accelerating payments or delaying receipts.
The won has been one of Asia's worst-performing currencies over the past year, pressured by persistent selling from global funds that have pulled money from Korean equities for 21 consecutive sessions. The KOSPI index has fallen sharply during that period as foreign investors exited.
Offshore NDFs in the Crosshairs
The authorities identified offshore non-deliverable forward derivatives as a key source of market distortion, saying herd behavior in that market has spilled over into onshore trading. The FSC asked banks to cooperate with plans to increase transparency and shift NDF activity into the domestic market.
"The key question is whether authorities can translate words into action," said Stephen Lee, an economist at Meritz Securities in Seoul. "If they don't want to be seen as standing by, they need to do more than just talk. Ultimately, it comes down to effective expectation management."
The measures follow a series of steps by Seoul to stabilize the currency, including allowing the National Pension Service to expand its forex hedging limit and easing foreign exchange regulations to improve dollar liquidity. South Korea joins a growing list of Asian nations taking proactive steps to defend their currencies as the dollar strengthens on expectations of higher-for-longer US interest rates.
The won's opening level of 1,555.2 was the highest since March 6, 2009, when it touched 1,590 during the depths of the global financial crisis. The last time South Korea mounted a similar coordinated intervention was during the 2008 crisis, when authorities injected dollar liquidity and guaranteed bank foreign-currency debt.
This article is for informational purposes only and does not constitute investment advice.
