South Korea inspects major FX banks for destabilising won trades

[SEOUL] South Korea escalated its defence of the won, moving from an emergency weekend meeting and warnings against speculative trading, to the first joint inspections of major foreign-exchange (FX) banks in 14 years.

The Bank of Korea and the Financial Supervisory Service (FSS) began on-site and off-site examinations of major FX banks on Wednesday (Jun 10), to determine if the institutions were engaging in trading that risked destabilising the FX market, based on a joint statement.

The authorities will also ascertain whether market participants attempted to move or pin exchange rates, to secure improper gains for themselves or third parties.

A flurry of recent measures underscores the government’s resolve to support the won, which tumbled to its weakest level since 2009 in the week of Jun 1.

The currency has come under pressure as foreign investors sold local stocks, and heightened Middle East tensions weighed on broader risk sentiment.

While a weaker currency can boost export competitiveness, a rapid depreciation raises the risk of imported inflation, capital outflows and broader financial-market instability.

“I see this as an effort to instill a greater sense of caution in a market that previously lacked a clear red line,” said Choi Je-min, an economist at Hyundai Motor Securities.

“With the US dollar-won rate having risen above 1,500, the divergence from economic fundamentals appears increasingly driven by market psychology. In such circumstances, the authorities are effectively the only actor capable of reining in those expectations,” he added.

The latest measures have diminished the chances of the US dollar-won rate reaching 1,600, as some in the market had feared, he noted.

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The won rose as much as 0.9 per cent to 1,514.30 against the US dollar on Wednesday (Jun 10) morning, before paring most of its gains later in the day. The currency has strengthened more than 2 per cent so far in the week of Jun 8.

Still, it remains one of Asia’s worst performers, down 5.8 per cent this year, trailing only the Indonesian rupiah.

An inspection by the nation’s Customs Service uncovered about 415.4 billion won (S$351.7 million) in illegal FX transactions at 38 companies between January and May, the government said in a separate statement.

The probe targeted companies with large trade and FX volumes over the past five years, which showed significant discrepancies between reported import and export values and the actual trade payments.

Wednesday’s on-site inspections and the customs office’s scrutiny comes after an emergency meeting convened by the authorities on Jun 7, and mark a shift from verbal warnings to direct oversight.

Officials have threatened to crack down on speculative FX trading, and warned exporters and importers from accelerating payments or delaying receipts to profit from the currency’s slide.

Those found to have violated regulations during the inspections will face strict penalties under relevant laws, based on statements issued since Sunday.

The FSS held an emergency meeting with domestic insurers on Wednesday, and urged them to refrain from expanding speculative FX positions on expectations of further won weakness.

The regulator told the institutions to diversify maturities of their FX hedging derivatives to avoid the risk of concentrated refinancing.

The FSS said on Tuesday that it would temporarily tighten the review of FX positions of major banks on a weekly or daily basis, from the current monthly schedule. BLOOMBERG