Authorities vow 'zero tolerance' for one-sided currency moves as won closes at 1,535

By Kim Byeo-ri, The Herald Business

The won-dollar exchange rate, which opened at its highest level since the global financial crisis, edged down Monday after authorities issued a verbal intervention warning.

The won closed at 1,535 per dollar in the Seoul foreign exchange market, strengthening 4.1 won from the previous session. It was the first time the closing rate had fallen in four trading days. The won has now traded above 1,500 per dollar for 15 consecutive trading days.

The currency opened at 1,555.2 won — the highest dollar reading since March 6, 2009 (1,590 won) during the global financial crisis. It briefly pulled back to the upper 1,540s before climbing above 1,550 again around 11 a.m.

At around 11:46 a.m., foreign exchange authorities issued a verbal intervention, saying they would "never tolerate excessive volatility or one-sided moves that are disproportionate to economic fundamentals and will respond forcefully." The won fell back below 1,550 and extended its advance, touching 1,533.3 before a slight rebound closed out the session.

The intraday trading range reached 21.9 won — the widest since Dec. 26 last year, when it hit 24.8 won.

Authorities believe the won-dollar rate has risen excessively relative to underlying economic conditions. Most economic indicators apart from the exchange rate have been broadly positive. The cumulative current account surplus through April reached a record $102.67 billion. First-quarter GDP growth came in at nearly double the forecast, delivering a surprise beat.

Authorities have identified speculative trading centered on the non-deliverable forward market as a primary cause and are weighing a range of countermeasures. NDFs are derivatives settled offshore on the difference in exchange rates at maturity, without any direct currency exchange. Traders need only post a margin deposit to take positions worth dozens of times the actual amount — a structure that allows relatively small sums to exert an outsized influence on the foreign exchange market.

While net selling of Korean equities by foreign investors has pushed the won lower, authorities believe speculative trading has driven the currency down even further, fueling expectations of continued won weakness.

On Sunday, Deputy Prime Minister and Minister of Finance and Economy Koo Yun-cheol, Bank of Korea Governor Shin Hyun-song, Financial Services Commission Chairman Lee Eok-won and Financial Supervisory Service Director Lee Chan-jin convened an emergency market review meeting to discuss the situation.

Meeting participants plan to have the Bank of Korea and the Financial Supervisory Service examine whether speculative activity or suspected market-disruption behavior is riding the wave of won weakness in the foreign exchange market, and to take strict action based on the findings.

Authorities are paying particular attention to trades intended to disrupt market function or interfere with price discovery, as well as one-sided trades executed at specific moments in volumes exceeding customer orders with the intent of moving prices against those customers.

In addition, a joint task force on illegal foreign exchange transactions — comprising the Ministry of Finance and Economy, the National Intelligence Service, the National Tax Service, the Korea Customs Service, the Bank of Korea and the Financial Supervisory Service — will be activated to investigate whether import and export companies are engaging in illegal transactions by accelerating import payments or excessively delaying receipt of export proceeds to capitalize on the rising exchange rate.

Authorities also agreed to analyze market conditions closely and develop measures to improve transparency in NDF trading and bring NDF transactions onshore. They are understood to be considering investigating market disruption and one-sided flows in NDF trading through domestic foreign bank branches, and exploring price incentives to draw NDF trading volume into the domestic market.