Dollar-Won Eases After Rally, But Positioning Uncertainty Deepens in Seoul FX Market

(Seoul=Yonhap Infomax) Ji Yeon Kim –

The dollar-won exchange rate, which recently threatened the 1,480 won level, retreated after seven consecutive sessions of gains, offering a brief respite for market participants. However, analysts note that significant uncertainty remains, making it difficult for traders to take decisive positions.

According to Yonhap Infomax’s comprehensive dollar-won trading data (screen number 2110), the dollar-won closed at 1,472.40 won on the previous day, down 4.70 won from the prior session. During extended after-hours trading, the rate briefly touched a low of 1,464.50 won.

From November 17 to 24, the dollar-won had climbed steadily, reaching the upper 1,470 won range. The recent pullback is attributed to growing expectations that the US Federal Reserve (Fed) may cut rates in December, combined with hopes that South Korea’s foreign exchange authorities will issue further stabilization messages, tempering overheated long positions.

“Even when the dollar index fell, the exchange rate didn’t drop, but with the level so elevated, any decline now triggers a strong sense that ‘today might be the day it falls,’” said a foreign exchange dealer at a local bank.

Authorities have moved swiftly to stabilize the FX market. On November 14, working-level officials from the Ministry of Economy and Finance met with finance managers from major exporters to seek cooperation in improving FX supply-demand. On November 19, Deputy Prime Minister and Finance Minister Koo Yun-cheol held a press briefing, stating, “We are working with major FX supply-demand entities to prevent excessive uncertainty or instability in the exchange rate.”

Two days later, on November 21, the Ministry of Economy and Finance, Bank of Korea, and Financial Supervisory Service convened a closed-door meeting with FX managers from nine securities firms in the Foreign Exchange Market Council to address early-session supply-demand imbalances.

On November 24, the Ministry of Economy and Finance announced that it would form a four-party consultative body with the Ministry of Health and Welfare, Bank of Korea, and National Pension Service (NPS) to discuss ways to enhance NPS returns while stabilizing the FX market.

At 10:00 AM today, Deputy Prime Minister Koo Yun-cheol is scheduled to hold an emergency press conference to deliver additional messages on FX market stabilization.

However, concerns persist over the use of the NPS as a tool for currency stabilization. Critics argue that such intervention could negatively impact the management of the nation’s retirement funds and that artificial FX hedging may erode the fund’s returns.

Given lingering uncertainty over the four-party consultative body’s policy direction, market participants remain hesitant to take aggressive positions. “There’s a lot of debate about using pension funds to defend the won, and it seems unlikely that any immediate action will be taken,” said a foreign exchange dealer at a securities firm. “With dollar demand still strong, it’s a difficult market to call.”

Ultimately, the direction of FX dealers’ positioning will likely depend on further messages from the authorities.

In addition to the NPS, dollar buying by retail and institutional investors—often referred to as “Seohak ants” (Korean retail investors investing overseas)—is also a factor to watch. If the dollar-won rate falls, importers may become more active in securing dollars.

In a report, Wi Jae-hyun, economist at NH Futures, outlined three scenarios for the four-party consultative body: increasing the NPS’s FX hedging ratio, modifying or easing strategic hedging conditions, and expanding or extending currency swaps with the Bank of Korea. “While actual measures remain to be seen, the immediate issue for the market is not just the NPS, but also supply-demand from individuals and institutions,” he said.

“As of August this year, the NPS accounted for about 41% of the total balance of domestic overseas equity investments. However, individuals and institutions hold even more than the NPS, so supply-demand instability is unlikely to dissipate soon,” he added.

jykim2@yna.co.kr

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