The government has begun measures to stabilize the market after the won-dollar exchange rate surged amid escalating tensions originating in the Middle East and expectations of U.S. interest rate hikes. To prevent excessive volatility in the foreign exchange market, it will crack down on speculative trading and conduct a full investigation into expedient transactions by importers and exporters that have ridden the rise in the exchange rate.

Deputy Prime Minister and Minister of Finance and Economy Koo Yoon-Cheol held an emergency market situation review meeting on the afternoon of the 7th at the Korea Federation of Banks building in Seoul with Bank of Korea Governor Shin Hyun-Song, Financial Services Commission Chairman Lee Eok-Won, and Financial Supervisory Service Governor Lee Chan-Jin, and announced this response direction.

Participants cited the escalation of tensions in the Middle East and expectations of U.S. rate hikes as key reasons behind the rapid rise in the won-dollar exchange rate over the weekend. They assessed that supply-demand factors, including profit-taking by foreign investors amid a buoyant domestic stock market, combined with some speculative trades, amplified exchange rate volatility.

Accordingly, the government and the Bank of Korea agreed that they will no longer tolerate excessive currency volatility or one-way herd behavior.

They also view non-deliverable forward (NDF) derivatives trading in offshore markets as shaking the domestic foreign exchange market and will begin analysis to enhance the transparency of such trades. Over the longer term, they plan to prepare institutional measures to absorb overseas speculative activity into the formal onshore foreign exchange market.

The Bank of Korea and the Financial Supervisory Service will conduct focused inspections to determine whether there are speculative moves or suspicious transactions that ride the weakness of the won in the foreign exchange market and will take stern action when detected.

Corporate ‘tricks’ intended to secure undue gains during periods of rising exchange rates have also been placed under investigation. The government will mobilize an illegal foreign exchange response team to closely examine unlawful practices in which importers and exporters rush to pay import bills while delaying receipt of export proceeds as much as possible to seek foreign exchange gains.

Deputy Prime Minister Koo emphasized, “Market volatility could grow again depending on how the war in the Middle East unfolds and on U.S. inflation trends,” adding, “We will monitor the market 24 hours a day with heightened vigilance and swiftly push forward with the measures prepared today.”

Given that the size of the domestic stock market has grown with the expansion of key industries such as semiconductors, the government will strengthen a comprehensive management framework to prevent risks in financial and foreign exchange markets from spreading to the real economy and will also accelerate reforms to the economic structure.