FX volatility likely to ease if Middle East tensions subside: banks

Exchange rates are displayed at a dealing room of Hana Bank in Seoul, Monday. Yonhap

Officials from major global investment banks and local lenders said Tuesday volatility in the Korean foreign exchange (FX) market is expected to ease when tensions in the Middle East subside given the country's solid economic fundamentals and stable foreign currency liquidity, according to the finance ministry.

The assessment was made during a meeting between the Ministry of Finance and Economy and officials from Goldman Sachs, Barclays, Deutsche Bank, BNP Paribas, Hana Bank and KB Kookmin Bank to discuss the impact of the conflict involving Iran on financial and FX markets.

The market participants noted that the FX market has experienced increased volatility due to external factors, though Korea's economic fundamentals remain solid, citing strong export performance and sound external stability.

They also said the country's foreign currency liquidity remains stable, and exchange rate volatility is likely to ease quickly if Middle East tensions abate, according to the ministry.

The Korean won has remained below the psychologically important 1,500-won level in recent sessions, as the conflict that began in late February following U.S.-Israeli strikes on Iran has pushed up global oil prices, fueling concerns over inflation and a potential economic slowdown.

Moon Ji-sung, director general for international economic affairs at the ministry, said various policy measures and changing market conditions will help improve supply and demand in the FX market, citing such factors as the inclusion of Korean government bonds in the World Government Bond Index (WGBI) and the launch of the reshoring investment account (RIA).

"The government will closely monitor developments in the Middle East and take decisive measures to stabilize the market if excessive volatility in the won emerges that is not in line with economic fundamentals," Moon added.

The won closed at 1,504.2 per dollar Tuesday, up 2.1 won from the previous session's close.

The won's strength came as investors closely monitored developments in the Middle East, with the Tuesday 8 p.m. (U.S. time) deadline set by U.S. President Donald Trump for Iran to reopen the Strait of Hormuz approaching.

Trump renewed threats to destroy Iranian bridges and power plants if Iran does not reopen the crucial waterway and reach a peace deal with the United States, while Iran rejected a 45-day ceasefire proposal, calling for a permanent end to the conflict, according to foreign media reports.