"You will see the government's capability" ultra-strong warning... year-end exchange rate 1450 won a line of defense

Foreign-exchange authorities, high-intensity verbal intervention…exchange rate falls by more than 30 won

"Weak won, strong determination" remarks

"Different from past interventions" surprises market

Seems to have sold more than $5 billion to lower the exchange rate

All-in on year-end closing price management

"Complete victory over the market…upside expectations broken"

"Sustaining management through intervention will be difficult"

On alert whether it will fall below 1450 won

'Excessive weakness of the won is undesirable. You will soon see the government's strong determination.'

The foreign-exchange authorities' verbal intervention message, announced immediately after the opening of the FX market on the 24th, considerably surprised market participants. The authorities, who had used restrained language such as 'volatility' and 'caution', took issue with the direction of 'weakness' and even revealed an intention for actual intervention. Along with the authorities' 'ultra-strong warning' and an estimated dollar sell-off of more than $5 billion, the exchange rate fell by more than 30 won intraday.

33 won plunge…1440 won range for the first time in 50 days

In the Seoul foreign exchange market that day, the won-dollar exchange rate (as of 3:30 p.m.) finished weekly trading at 1449 won 80 jeon, down 33 won 80 jeon from the previous day. The rate opened at 1484 won 90 jeon that day but plunged from the early session under the influence of the authorities' active market intervention. The intraday decline was the largest since November 11, 2022 (59 won 10 jeon), when expectations for the end of U.S. rate hikes spread.

Around 9 a.m. that day, the foreign-exchange authorities made an official verbal intervention in the names of Kim Jae-hwan, Director General for International Finance at the Ministry of Economy and Finance, and Yoon Kyung-soo, Director General for International Affairs at the Bank of Korea. The authorities stated, "You will soon see that holding a series of meetings over the past one to two weeks and announcing respective measures by each ministry and institution was a process of organizing the situation to demonstrate the government's strong determination and comprehensive policy implementation capability."

It was the first time in a year and eight months since April 16 last year, when the exchange rate touched 1400 won, that a director-level official from the FX authorities directly carried out verbal intervention. The market noted that the verbal intervention was stronger than at any previous time. During last year's verbal intervention, the authorities said they were "watching exchange rate movements and foreign exchange supply and demand with particular caution." This time, however, they mentioned the exchange rate level as a problem, calling it weakness, and strongly revealed the government's willingness to intervene.

Alongside the verbal intervention, the market estimates that an actual large-scale dollar sell-off took place. An FX executive at a commercial bank said, "The government showing a strong verbal intervention stance from early morning should be seen as a determination to sell a considerable amount of dollars," adding, "Considering the exchange rate fell to the 1440 won range, more than $5 billion likely came out during the day."

Will it fall below 1450 won by year-end?

In the FX market, there is a high likelihood that the authorities' market management will continue until year-end. A finance industry source said, "If the exchange rate rises further from here, not only importers but also exporters who purchase intermediate goods overseas to manufacture finished products will face higher cost burdens, and domestic prices and interest rates could rise together," adding, "When the government steps in directly, it appears set to intervene strongly enough that one should not oppose it, and it seems likely to calm the exchange rate."

The authorities have not hidden their stance on managing the year-end closing price. Han Jeong-su, Deputy Governor of the Bank of Korea, recently said at a press briefing, "A sharp rise in the exchange rate could burden financial institutions' capital ratios at year-end," and "We are closely monitoring market conditions as volatility has increased." A senior FX authority official said, "National economic report cards, such as GDP per capita, are often linked to year-end exchange rates," and "the government cannot help but be attentive."

Park Sang-hyun, a research fellow at iM Securities, said about the day's exchange rate movement, "The forces held on but were pressed by the authorities, resulting in a staircase-like decline in the exchange rate," and "the authorities achieved a complete victory in the market." He added, "I don't think the authorities will create a trend of the exchange rate rising again until year-end," and "I initially expected the year-end closing price to be 1450 won, but it could fall to around 1440 won."

Choi Ji-wook, a researcher at Korea Investment & Securities, forecast, "If the year-end exchange rate falls below 1450 won, upside expectations will be dampened and stability may appear."

However, there is also the view that sustaining exchange rate management through intervention will be difficult. Lee Yoon-su, a professor of economics at Sogang University, warned, "The authorities can pull the exchange rate down in the short term to manage it for year-end, but it is difficult to dampen expectations for overseas investment," adding, "The exchange rate could revert again in early next year."

Kang Jin-kyu/Kim Jin-sung josep@hankyung.com