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Last updated: November 23, 2012 3:29 am
South Korea is considering tightening restrictions on trading in currency derivatives by banks due to fears that the won’s rapid appreciation could threaten financial stability.
“We need some measure to mitigate the volatility of the foreign exchange market,” Choi Jong-gu, deputy finance minister, told the Financial Times. “Recent movement of the market shows that the volatility continues to increase, mainly driven by some expectation that the won will continue to appreciate further.”
Mr Choi said the government hoped to decide next week whether to lower the limits for forex derivatives exposure from the current level of 40 per cent of equity capital for domestic banks, and 200 per cent for Korean divisions of foreign banks. Such a move would mark the first tightening of macroprudential regulations since August 2011.
The won weakened 0.3 per cent against the US dollar after Mr Choi made similar remarks to reporters earlier on Thursday. But at Won1,085.9 to the dollar, it has risen 9.3 per cent since May, propelled by a persistent current account surplus and net inflows from foreign investors.
Monetary authorities in Seoul have tried to restrain the won’s rise from its trough in 2009 of more than Won1,500 to the dollar. These efforts have included sales of the won, which traders estimated amounted to as much as $1bn on Thursday.
There have been other measures, such as the reintroduction of a levy on foreigners’ bond investments. This month regulators also launched a probe into whether banks had broken forex restrictions.
Mr Choi stressed that the new measures under consideration were intended to protect financial stability rather than support exports, which account for more than 50 per cent of South Korea’s gross domestic product.
“Let me be very clear. We have no idea what is the right level of the won,” he said. “What concerns us is the volatility. We’ve experienced it several times, in 1997, in 2008, and we were close to another crisis in 2011. We’re not worried about exports or imports.”
Quantitative easing in countries such as Japan was contributing to the volatility of the won, Mr Choi added.
Erik Lueth, an economist at Royal Bank of Scotland, said it was prudent for the authorities to “lean against the wind” of currency appreciation, provided they did not target a level for the won.
“In emerging markets, the forex markets are much less deep and liquid than they are for the dollar and the euro, so there is some rationale for intervening and slowing these movements,” Mr Lueth said.
This article has been amended to make clear that the new measures under consideration are specific to currency derivatives trading.
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