SEOUL, Oct 30: South Korean authorities plan to inspect foreign exchange trading at banks operating in the country from next week, a senior finance ministry official said on Tuesday, a move seen as aimed at curbing the won’s strength.
The central bank and the Financial Supervisory Service—a financial markets regulator—plan to jointly investigate the banks to look into their foreign exchange and derivatives trading, the official said.
Analysts and traders said the move underscored the intention of policymakers to cap the won’s rapid appreciation for fear it would hurt the competitiveness of exporters. Officials at the ministry and the Bank of Korea denied the argument.
‘There’s been an increase in (currency derivative) positions in the first half. It’s partly because their equity has increased, but the U.S. Fed implemented QE3 and conditions have changed, and so we want to closely monitor the market,’ another finance ministry official said.
All officials declined to be identified.
South Korea introduced ceilings on currency derivative positions at banks two years ago as part of its efforts to mitigate the rush of foreign capital into the country because a sudden reversal in the flow could cause a currency crisis.
The government has said it could adjust the ceilings depending on the market’s situation on a quarterly basis and analysts said the planned inspection could lead to a toughening in the regulations for the next quarter.
‘I think they’re trying to slow (the won’s appreciation) down to a point. But in the long term, the strengthening trend (of the won) will be maintained,’ said Ma Ju-ok, economist at Kiwoom Securities.
Traders showed a muted reaction as they have already been wary of potential market interventions by local foreign-exchange authorities. The won was down less than 0.1 percent against the dollar as of 0140 GMT.
South Korea and other emerging market economies have been complaining about large capital inflows resulting from ultra-loose monetary policy in advanced countries that were lifting their currencies and destabilising their markets.
The won has gained 5.1 percent against the dollar this year and the pace of increase has quickened in recent weeks. In cross-rate terms, the won has strengthened nearly 10 percent against the yen and by 5 percent against the yuan so far this year.
South Korean exports fell 5.6 percent during the third quarter over a year earlier as the protracted crisis in Europe put an additional dent on demand around the world at a time of slowing growth elsewhere.
The country’s economy, the fourth-largest in Asia, posted almost no growth in the July-September period over the previous quarter as a gloomy export performance prompted companies to slash investment in plants.
Sustained current account surpluses, mainly as a result of depressed imports, also supported the won’s strength, with data from the Bank of Korea showing on Tuesday that the country posted a current account surplus of $3.9 billion in September.
It was smaller than a revised $4.46 billion surplus in August, but the country has been posting current account surpluses each month for three and a half years. (AGENCIES
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