South Korean Won Approaches Critical Dollar Sale Threshold Ahead of Central Bank Decision

The South Korean won has recently fallen to its weakest level since April, trading at approximately 1,479 won per dollar. This decline, which represents a 0.5% drop, is attributed to increased overseas investments by local funds, putting pressure on the currency ahead of the Bank of Korea's (BoK) policy decision this week. The won's year-to-date losses contrast sharply with the performance of most emerging market currencies, which have generally appreciated against the US dollar.

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Local investors in South Korea have increasingly turned to leveraged exchange-traded funds (ETFs), particularly those tracking high-performing technology stocks listed in the United States. This trend has intensified the outflow of capital from the domestic market. Citigroup Inc. strategists have indicated that the won is nearing a critical threshold of 1,480 won per dollar, a level that could trigger significant dollar sales by the National Pension Service (NPS). Such sales could amount to approximately $50 billion, aimed at stabilizing the currency.

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In response to the currency's decline, South Korea's finance ministry has convened a group involving the government, the Bank of Korea, and the NPS to discuss potential measures. These discussions focus on aligning the profitability of the NPS with the stability of the foreign exchange market. Economists, including Rory Green from TS Lombard, anticipate that dollar sales by the NPS may occur within the next month, potentially through a foreign-exchange swap with the BoK. This strategy would allow the NPS to access central bank funding for offshore investments, thereby mitigating equity outflows.

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The current weakness of the won has implications for the BoK's upcoming interest rate decision. Among 22 economists surveyed by Bloomberg, 19 predict that the central bank will maintain its current interest rates. Analysts suggest that the combination of a weak won, rising housing prices, and fiscal stimulus measures provides the BoK with the flexibility to adopt a patient approach in future meetings.

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Despite the measures being considered, some economists express caution regarding the urgency of the authorities' response. Bumki Son from Barclays Bank Plc noted that while the won's recent movements are concerning, they do not view the situation as disorderly. He suggests that the current level of the won may become a "new normal," indicating a potential shift in expectations regarding currency stability.

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• “This could come through a Bank of Korea foreign-exchange swap with the NPS to allow the fund to tap central-bank funding for offshore investments, reducing equity outflows,” — Rory Green, Economist at TS Lombard

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• “Ultimately, the key issue is how much urgency the authorities feel at this level,” — Bumki Son, Economist at Barclays Bank Plc

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The South Korean won's trajectory remains a focal point for both investors and policymakers as they navigate the complexities of the foreign exchange market and its implications for monetary policy.

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