Korea Limits Bank Currency Forwards More Amid Won Gains

South Korea Further Limits Bank Currency Forwards Amid Won Gains
The won is the best-performing Asian currency against the dollar in the second half of this year. Photographer: SeongJoon Cho/Bloomberg

South Korea tightened limits on the amount of currency forward positions banks are allowed to hold as won gains threaten exports.

Authorities will cap transactions at branches of overseas lenders at 150 percent of equity, compared with 200 percent currently, according to a statement today from the Finance Ministry, Bank of Korea and the Financial Services Commission. The ceiling for domestic banks will be cut to 30 percent from 40 percent. The changes will take effect on Dec. 1, with a one-month grace period to Jan. 1.

The won has strengthened 5.7 percent against the dollar since the end of June, the best performance among the 11 most-traded Asian currencies. It retreated from a 14-month high last week after Deputy Finance Minister Choi Jong Ku signaled on Nov. 22 that the government may announce such measures. Exports have contracted this year in seven of the 10 months through October.

“The relevant ministries agree that volatility is increasing in the financial markets,” according to the statement. “We will act pre-emptively to prepare measures against increased volatility.” Forwards are agreements to buy or sell assets at a set price and date.

South Korean officials are reviewing further foreign-exchange regulations including tighter rules on currency forwards, Kim Seok Dong, chairman of the Financial Services Commission, told reporters in Seoul today.

Exports Rise

A government report on Dec. 1 will show overseas shipments increased 1.6 percent this month from a year earlier, according to the median estimate of economists in a Bloomberg News survey. Exports from Asia’s fourth-biggest economy expanded 1.1 percent in October.

The won strengthened 0.1 percent to 1,084.08 per dollar at the close in Seoul, according to data compiled by Bloomberg. It reached 1,080.05 on Nov. 22, the highest level since Sept. 9, 2011. The Kospi index of stocks climbed 0.9 percent.

“The announcement on forward limits was already expected,” said Jeon Seung Ji, a Seoul-based currency analyst at Samsung Futures Inc. “With dollar liquidity stable in South Korea, the policy will do little to curb won appreciation.”

South Korea first announced measures to curb trading in foreign-exchange derivatives in 2010. Branches of overseas banks were required to cut holdings to 250 percent of equity and local banks to 50 percent. The limits were slashed last year to 200 percent and 40 percent, respectively.

The won weakened 0.1 percent in the three months following last year’s announcement on May 19, 2011, after having gained 3.7 percent that year.

“The outlook remains quite bullish for the won for next year,” said Jeong Young Sik, a Seoul-based economist at Samsung Economic Research Institute. “There’s liquidity flooding in from advanced countries and more investors are getting confident about the country’s fundamentals.”

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