Bank of Korea Governor Shin Hyun-song stated on May 28 that he will take decisive action against the recent volatility in the won-dollar exchange rate.
Following a monetary policy committee meeting where the base rate was held steady at 2.50%, Shin emphasized, "We will not tolerate exchange rate volatility, and we have the means and will to address it through various methods."
He identified the ongoing conflict in the Middle East as the primary factor contributing to the weakening of the currency. "The situation in the Middle East triggers risk-averse sentiment and affects markets not only in Korea but also in countries that heavily import oil," he said. "Countries that import oil see their exchange rates significantly influenced by oil prices, and if the situation in the Middle East stabilizes quickly, there is a strong possibility that the won will appreciate considerably in the future."
Regarding the recent surge in the exchange rate, Shin pointed to the non-deliverable forward (NDF) market, noting, "NDF transactions lack transparency and often require anonymity. Particularly, when NDF trading occurs in offshore markets during Korean nighttime, it necessitates hedging, which can impact the domestic market."
He proposed that a key solution would be to promote the internationalization of the won, bringing it into the formal financial system. "This would involve securing won through swap market transactions with the U.S. dollar, allowing for the reinvestment of principal. To achieve this, the use of the won must be expanded and formalized," he explained.
Shin also commented on remarks made by Kim Yong-beom, head of the Presidential Policy Office, who stated on May 24 that high interest rates, inflation, and exchange rates are unavoidable costs of success as the Korean economy transitions to a new phase. Shin interpreted this as a sign of foreign investors' confidence in Korea. He added, "From the central bank's perspective, the exchange rate is a crucial factor in terms of liquidity, financial stability, and its impact on import prices, which can stimulate inflation."
On the recent rise in market interest rates, Shin attributed it to international conditions but emphasized the importance of balance among market participants. He noted, "The recent increase in Korean government bond yields is part of a global trend, primarily driven by the conflict in the Middle East. Concerns about inflation and fiscal stability in major countries have led to rising bond yields, and Korean bonds are following suit."
He concluded, "Stabilizing the bond market fundamentally requires participants to find balance. It is desirable for buyers and sellers to reach a consensus on price determination."
* This article has been translated by AI.
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