Financial authorities vow stern action against excessive volatility, one-sided FX market moves

A dealer watches computer monitors at a dealing room at Hana Bank in Seoul, Monday. Yonhap

Financial authorities on Monday vowed to take strict action against excessive volatility and one-sided movements in the foreign exchange market amid the weakening Korean won.

"We assess that, in addition to supply and demand factors, certain speculative foreign exchange transactions, such as non-deliverable forwards (NDFs), have recently contributed to increased volatility in the foreign exchange market," a joint statement from the Ministry of Economy and Finance and the Bank of Korea said.

"We will not tolerate excessive volatility relative to economic fundamentals or one-sided market movements, and we will respond firmly to such situations."

The strong verbal intervention came as the Korean won has fallen sharply against the U.S. dollar.

As of 3:30 p.m., the Korean currency was quoted at 1,535 won per dollar, down 4.1 won from the previous session, after weakening to as low as 1,555 won against the greenback earlier in the day.

It marked the won's first gain in four sessions based on the 3:30 p.m. quotation, but remained above the 1,500-won level for the 15th consecutive session.

On Friday, the won traded at 1,538.1 won per dollar at 3:30 p.m., up 1 won from the previous session, marking the weakest level for the won since March 9, 2009.

Chiefs of the finance ministry, the Bank of Korea, the Financial Services Commission and the Financial Services commission held an emergency meeting on Sunday to review the foreign exchange market.

They said the recent weakness in the local currency was not driven by economic growth concerns or simple supply-demand dynamics, citing the country's record current account surplus in the January-April period and strong exports, according to officials.

Net selling by foreign investors in the stock market has accelerated downward pressure on the won, they said. Foreign investors have remained net sellers for 20 consecutive sessions since May 7 as part of portfolio rebalancing.

The broader strong-dollar trend has also weighed on the local currency, as better-than-expected U.S. employment data dampened hopes for an interest rate cut by the U.S. Federal Reserve.

However, they pointed to growing market expectations that the won-dollar exchange rate could rise further toward 1,600 won, as well as speculative activity and one-sided positioning, which they said have fueled market volatility.

Authorities will launch investigations into whether speculative activities are capitalizing on the weakening won or whether there have been attempts to disrupt the market, while also urging exporters to convert dollar holdings into won more quickly.

They also plan to unveil measures to reduce reliance on the NDF market ahead of the around-the-clock opening of the country's foreign exchange market.

NDFs are over-the-counter derivatives contracts used primarily in emerging markets with capital controls, where currencies cannot be freely delivered offshore.