With the won-dollar rate topping 1,530… Bank of Korea: ‘We will respond if FX-market herding becomes pronounced’

Yoon Kyung-soo, director general of the International Department at the Bank of Korea, said on the 31st, “From the FX market flow perspective, we are watching closely as foreign equity outflows have been substantial. If market sentiment and herding become clear—if the divergence (from other currencies) widens—we will respond. We are monitoring the situation carefully.”

At a press briefing that day, Yoon made the remarks in response to a question about current exchange-rate conditions, saying, “We do not directly target a specific exchange-rate level, but the won has been rising rapidly in terms of speed lately.”

Commenting on remarks by Shin Hyun-song, the central bank governor nominee, that “there are no major concerns about the current exchange rate,” Yoon added that “the point was that one should be cautious about linking it to a crisis situation simply because the exchange-rate level is high.” He explained, “The exchange-rate level is not directly tied to a crisis; what matters is whether dollars can be procured, and at present there is no problem at all with dollar funding in the market for lending and borrowing dollars.”

He cited foreign equity outflows as a key driver of the recent rise in the exchange rate. “Foreign equity funds have been leaving in large amounts every day,” he said, adding, “Over the past year, the share of foreign equity funds relative to domestic market capitalization has grown very large.” He continued, “We see the outflows as rebalancing as the weighting of the won has increased significantly,” and analyzed, “It is clear that the pace of outflows has acted as upward pressure on the exchange rate from a supply-and-demand standpoint.”

On the day, FX authorities including the Bank of Korea said they net sold a total of $22.467 billion in the fourth quarter (October–December) last year to stabilize the FX market. It was the largest quarterly net selling on record.

Yoon said, “Supply-demand imbalances were particularly severe in the fourth quarter last year,” explaining, “In October, the scale of residents’ overseas securities investment funds grew to about three times the current account balance.” He added, “Compared with other currencies, the depreciation was larger and market expectations were heavily tilted in one direction, so the scale of market-stabilization measures also increased.”

Reporter Shim Sung-mi smshim@hankyung.com