Koreans trade dollars in the darndest of ways as won collapses

Finance

Published: 10 Oct. 2022, 16:45

Koreans trade dollars in the darndest of ways as won collapses

An employee inspects dollars at Hana Bank’s Counterfeit Notes Response Center in Jung District, central Seoul, on Oct. 4. [YONHAP]

Dollars are being traded online as the won crashes and inflation remains high.

Individuals dumping the local currency or betting on its rebound, or simply seeking dollars ahead of an overseas trip, are looking ways to save money on the trade by getting rid of the middleman, the banks.

On Danggeun Market and Joonggonara, the dollar-won market is active these days, and those who are willing to go to the trouble and take the risk of dealing with unknown counterparties can cut the spread.

Danggeun Market and Joonggonara are online flea markets, akin to Ebay, where used sofas, lands, frying pans and trucks can be found. Normally, buyer and seller have to arrange a meeting or arrange shipping of the items being sold.

In currency trades, the people making the deal will normally meet.

Buyers of dollars include those planning overseas trips and study abroad and investors collecting dollars for investment. Amounts traded on the online used markets vary from just a couple of dollars to several thousand.

“I want to buy dollars at five won lower than the selling price” at banks, wrote a Danggeun Market user on the app on Sept. 30, adding that it’s for a honeymoon. “I already spent a lot of money preparing for a wedding, and the rise of the dollar is making me want to cry.”

“Selling $900. Offering a rate that is five won lower than the rate displayed on Naver,” another user wrote.

Posts seeking to trade dollars on Danggeun Market [SCREEN CAPTURE]

Large banks in Korea charge about a 1.75 percent spread from the mid-rate for buying dollars with won or selling dollars for won. That is about a 3.5 percent difference between what a buyer would get from the bank and what the seller would get from the bank. In private transactions, this cost can be eliminated.

In a $1,000 transaction, each side would save about 25,000 won ($17.7) by trading direct with each other rather than via a financial institution.

Individuals trading dollars is legal as long as they meet certain conditions.

Residents in Korea are not required to report foreign exchange transactions if the purpose isn't to profit from the exchange and the amount is less than $5,000, according to the Foreign Exchange Transaction act.

The interpretation of the act “can be subjective,” said Ko Seok-kwan, a spokesperson for the Bank of Korea. It’s “difficult to prove” whether the purpose of the trade is profit. But the amount individuals trade dollars is “very insignificant” compared to total dollar currency transactions, and most of the dollars individuals trade are leftover currency following travel overseas.

The possibility of scams and theft exist with private currency transactions, and off-the-books trade of currency might also be related to money laundering, which could get an unsuspecting buyer caught up in criminal activity.

The dollar has been rallying lately as the U.S. Federal Reserve raises interest rates rapidly and signals continued hawkishness, and the won is down 19 percent against the U.S. currency this year and trading at levels not seen since March 2009.

It closed at 1,412.40 won on Friday. The market was closed on Monday for a holiday.

As the dollar strengthens, Korea’s total foreign reserves fell for the second month in a row in September.

The Bank of Korea said foreign reserves fell to $416.8 billion as of the end of last month, from $436.4 billion a month earlier. It was the largest monthly fall after that of October 2008.

The financial authorities said they are considering numerous options to stabilize the foreign exchange market.

The Financial Services Commission (FSC) may activate a 10 trillion-won “securities market stabilization fund” to boost the stock and foreign exchange markets, according to FSC Vice Chairman Kim So-young.

The fund, created with the Korea Exchange, brokers and banks, is designed to stabilize the stock market by adding liquidity in times of rapid declines. It may also help the won.

“When the fund is used, it is considered a favorable for the stock market, and could attract more foreign investors into Korea,” said Shin Yong-jin, a spokesperson for the FSC. “They will bring more dollars to Korea, and that could eventually stabilize the currency exchange rate."

The fund was created in March 2020 after the stock market crashed following the Covid-19 outbreak. It was not used as the market quickly recovered. A decision on whether to activate the fund is expected to be finalized later this month.

Temporarily offering tax incentives to retail investors that sell overseas stocks and convert the proceeds to won was also considered a possible measure by the government to stabilize won, according to a report from Yonhap on Oct. 3.

The Ministry of Economy and Finance denied it is reviewing the measure, citing the difficulty of the policy’s execution and its effectiveness.

The Bank of Korea and the Finance Ministry agreed last month to open a dollar-for-won currency swap line with the state pension fund to ease demand for dollars. This mechanism enables the National Pension Fund to exchange won its has for dollars held by the central bank and the government so it does not have to buy dollars in the open market when it makes foreign investments.

In the second quarter, the Bank of Korea and the government sold $15.49 billion of dollars to stabilize the won. This figure is reported quarterly one quarter delayed.

A swap agreement with the United States remains a topic of discussion, with the government and central bank mentioning the possibility of a deal without saying if or when one will be signed.

Korea had a currency swap with the United States from November 2008 and February 2010 and another from March 2020 to December 2021.

Under these arrangements, Korea is able to access dollars at a set rate over a given period of time from the Federal Reserve, ending fears about a dollar shortage and bringing confidence to the market.

“Consistent policy is very important for economic stabilization because the financial market responds much more sensitively towards government policy when the policy is considered to have a loophole during times of volatility, as was recently seen by the UK tax cut,” said Chang Min, a senior research fellow at the Korea Institute of Finance.

“Temporary measures are necessary when the foreign exchange market shows one-sided movement, but attempts to defend an exchange rate to a certain level amid globally strong dollar may risk losing market trust without obtaining the effective results.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]