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Foreign exchange rules eased in bid to revive tanking won

Published: 20 Dec. 2024, 17:37 Updated: 20 Dec. 2024, 17:39

PARK EUN-JEE
[email protected]

Currency rates are displayed at a money exchange shop in Myeongdong, central Seoul, on Dec. 20. [YONHAP]

Korea’s financial authorities softened foreign exchange rules in a bid to attract a higher inflow of foreign currency against a backdrop of a sharply depreciating won and accelerated capital outflow.

A major change was made to the cap on foreign exchange futures for local lenders. The ceiling of foreign exchange futures contracts will be raised from the current 50 percent to 75 percent of capital holdings within this year, according to the Ministry of Finance and Economy. For foreign bank branches operating in the country, the limit will be increased from 250 percent to 375 percent.

Easing the limits is expected to help the lenders secure foreign currency liquidity more efficiently, the ministry said. The policy was initially introduced in 2010 to curb excessive foreign borrowing.

The local currency had long been under mounting pressure stemming from domestic political turmoil. It dropped sharply against the U.S. dollar Thursday to reach the 1,450 won level, the weakest since March 2009, after the U.S. Federal Reserve hinted at two rate cuts next year instead of the four announced earlier.

"Considering changes in the international financial and foreign exchange (FX) market environment, we have decided to reassess our policy framework," a Finance Ministry official said, adding that restrictions on FX inflows would be eased within limits that ensure external stability.

The authorities also said they plan to relax restrictions on foreign currency loans provided by domestic banks to residents who use the funds for non-Korean won purposes.

The changes will allow companies, regardless of their size, to access foreign currency loans for facility investment, the authorities said.

Previously, such loans were mostly prohibited, except for limited cases involving facility funding for small and medium enterprises.

"Increased FX loans are expected to enhance FX liquidity in the market, potentially lowering the Korean won-U.S. dollar exchange rate," the official said.

In line with the effort, the Bank of Korea and Finance Ministry agreed on Thursday to expand their foreign exchange swap arrangement with the National Pension Service (NPS) by upping the deal’s cap from its current $50 billion to $65 billion and extending its validity period to the end of 2025.

The currency swap deal enables the authorities to provide dollars to the pension fund in exchange for an equivalent amount of won. The NPS later returns the same amount of dollars to the authorities for conversion back to the local currency.

Despite the efforts, the Korean currency stayed near its lowest level in more than 15 years on Friday as the U.S. economy grew faster than expected in the third quarter, weakening the need for the Fed to hurriedly deliver rate cuts, along with political turmoil at home.

The won was quoted at 1,451.4 per dollar at 3:30 p.m. Friday, up 0.5 won from the previous session.

The currency opened at 1,450 won against the greenback, one day after dipping to 1,451.9 won, the lowest since March 2009, and sliding further to as low as 1,452.3 won during intraday trading on the onshore settlement platform.

The benchmark Kospi index was also in a negative territory as it plunged 31.78 points, or 1.3 percent, to close at 2,404.15 after falling below the 2,400 threshold at one point during the session.

Foreigners and institutions dumped local shares worth 817 billion won and 89.1 billion won, respectively, while retail investors bought a net 790 billion won.

"The stock market is experiencing growing volatility amid uncertainties in the U.S. monetary policy," said Kim Ji-won, an analyst at KB Securities. "Market sentiment over risky assets will remain subdued for the time being."

Samsung Electronics slid 0.19 percent to 53,100 won, and SK hynix lost 3.71 percent to 168,500 won.

Financial shares also tumbled, with KB Financial falling 1.27 percent to 85,800 won and Shinhan Financial moving down 1.23 percent to 48,250 won.

Leading pharmaceutical giant Samsung Biologics also declined 1.98 percent to 939,000 won, while Celltrion edged up 0.05 percent to 192,500 won.

Bond prices, which move inversely to yields, closed lower. The yield on three-year Treasurys rose 2.6 basis points to 2.629 percent and the return on the benchmark five-year government bonds gained 3.9 basis points to close at 2.775 percent.

BY PARK EUN-JEE, YONHAP [[email protected]]