Research shows the won No. 1 in volatility in Asia

The Korean won has been the most volatile Asian currency over the past three years, data showed Wednesday, indicating the local foreign exchange market has yet to normalize after the 2008 global financial crisis.

According to the data compiled by Samsung Economic Research Institute (SERI), the won’s volatility index came in at 10.4 percent from January 2010 to December 2012, hovering above the 5 percent average tallied for the 10 major Asian currencies.

The index measures a currency’s daily fluctuation against the U.S. dollar, with a higher number indicating more volatility.

Korea also held the top spot among Asian currencies between July 2007 and June 2009, with its volatility index reaching 22 percent. The average index for the 10 major Asian currencies came in at 6.2 percent.

Market watchers said the volatility is mainly attributable to the country’s heavy dependency on the U.S. dollar and foreign investors, while its market size remained relatively small compared to global peers.

“Korea should expand won-based settlement in trade, while more local brokerage houses and retail investors should get involved in the foreign exchange market,” said Jung Young-sik, a researcher at SERI.

Meanwhile, foreign banks operating in Korea added to the protracted volatility as they placed excessive bets on foreign exchange derivative trading, according to the state-run Korean Development Institute.

The KDI said that during the 2008 global financial crisis, foreign banks sought so-called carry-trades in Korea to take advantage of the country’s relatively high interest rates.

Carry-trades refer to the practice of borrowing low-yielding currency to invest in higher-yielding assets in other countries, which adds to the volatility in the foreign exchange market.

Yonhap