Jawboning the Won: Decoding Comments by Korean Policy Makers

  • Won falls to five-year low as China's woes hit South Korea
  • Currency has dropped about 3% this month, the most in Asia

As the South Korean won trades near a five-year low against the dollar amid increased uncertainty in China and the slump in global financial markets, policy makers have stepped up their commentary on foreign exchange.

While Bank of Korea Governor Lee Ju Yeol has acknowledged weakness in the won is “inevitable” given that China is the nation’s biggest trading partner, officials are on guard against rapid moves in the currency.

Finance Minister Yoo Il Ho has said authorities will take action “swiftly” if they see sharp volatility, while still adhering to the broader principle that the market sets exchange rates.

The currency has dropped about 3 percent so far this month, the biggest decline in Asia. This gives clear benefits to exporters but the pace of change fuels instability and has raised concern that it will spur more outflows of capital from Korean markets.

Examples of comments on currency by Korean policymakers

Government and central bank officials say any intervention in the currency market is always limited to “smoothing operations,” and they never reveal the size or timing of any action. Warnings about the won can come from the Finance Ministry, the Bank of Korea, or both in joint statements, and can take the form of text messages, phone calls and remarks to reporters.

Following is a guide to some of the gradations of language that officials have used previously when commenting on the currency, in many cases when it was strengthening. Of course, policy makers can always introduce new terms, and as with investment returns, past performance isn’t necessarily a guarantee of future results.

Sudden moves, or the won breaks resistance or support levels 

  • Sharp currency fluctuations are “not desirable.” We are “closely watching FX market for herd behavior.”
  • They may also warn that moves have been “fast” if the trend persists.

Increased volatility, bringing hints of intervention

  • “If there is a very sudden tilting toward one direction in a very short period of time in the foreign exchange market, then there would be some smoothing operations.”
  • At the same time, they may say: “The foreign exchange rate should be determined by the market.”

Highlighting speculative moves, foreign investors

  • “Authorities are closely watching with caution for speculative moves in the offshore market and in foreign capital inflows. There is no change in our stance that we’ll try to prevent herd behavior and reduce volatility.”

Vows to act against sharp and one-sided moves

Joint warnings by the Finance Ministry and BOK

  • “The government and the Bank of Korea judge that recent one-sided gains in won-dollar have been somewhat excessive, and are concerned that herd behavior is intensifying.”

NOTE: The ministry, central bank and financial regulator held an emergency meeting on Jan. 6, as the won plunged after North Korea’s nuclear test and instability in China’s financial markets intensified. The government said South Korea will be on “utmost alert” and take action if needed.