Won's Slump Sparks Verbal Intervention From South Korea

  • Currency pares losses after policy makers pledge action
  • Korean won is worst performer in Asia so far this year

South Korea’s policy makers warned movement in the won has been “excessive” and said they will take any necessary action to curb volatility that has driven the currency to the lowest level in more than five years.

The finance ministry and central bank said in a text message that they are concerned about “herd behavior” in the market. The won strengthened about 0.9 percent within minutes of the news.

The won had fallen recently on speculation the central bank may lower interest-rates further and as capital outflows from emerging markets including South Korea have accelerated amid global risk aversion. Rising tensions with North Korea have also damped the attractiveness of South Korean assets.  

“Verbal intervention tends to have only a short term impact., but if followed up with actual intervention, it can have more of an effect.,” said Khoon Goh, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore.

While weakness is often seen as beneficial to the competitiveness of Korean exporters, the rapidness of depreciation is unsettling to South Korean policy makers.

BOK Governor Lee Ju Yeol said after holding the key interest rate unchanged this week that capital outflows were expected to last for some time, and that the bank will take action if needed. Global investors withdrew $2 billion from South Korea’s bond market this month through Thursday, while selling a net $453 million of equities through Friday.

The won earlier depreciated to as low as 1,239.59 against the dollar, the weakest since June 2010. It weakened 0.6 percent on Friday to close at 1,234.36 as of 3 p.m. in Seoul. The won has fallen 5 percent against the dollar this year, making it the worst performer among Asian currencies.

There were “strong” dollar selling orders seen when the won traded near 1,239 and 1,234 against the dollar, which looks like smoothing operation by the authorities, according to a Seoul-based trader who declined to be named citing bank policy.

The finance ministry and central bank also performed a joint verbal intervention in July 2014 when the won was rapidly appreciating.

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