Seoul eases forward rule to bolster USD liquidity, but FX volatility persists

2020.03.18 10:43:42 | 2020.03.18 16:15:05

[Photo provided by Ministry of Economy and Finance]이미지 확대

[Photo provided by Ministry of Economy and Finance]

South Korea has offered to ease foreign currency forward rules in the face of shortages of the U.S dollar due to surging greenback demand from the coronavirus pandemic. But the move fell short of curbing volatility in the foreign exchange market.

Under the new rules effective Thursday, the cap on foreign exchange forward positions for local banks would be raised to 50 percent of their equity capital from 40 percent, according to the joint statement from the finance ministry, Bank of Korea, Financial Services Commission and Financial Supervisory Service Wednesday.

For foreign banks, the ceiling would be raised to 250 percent from 200 percent.

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The easing is to help address mismatches in forex swap markets as investors rush to liquidate their assets to put their money in safer bets like the U.S. currency, the authorities said. The dollar swap, or the cost of raising dollars, has hit six-year highs.

The cap was first imposed in 2010 to control capital outflows and surge in short-term foreign debt in the aftermath of the 2008 financial crisis.

The Korean won strengthened initially from the announcement, but finished 2.20 lower against the dollar at 1,245.70.

Korean markets slumped back to where they were a decade ago as the stream of new stimulus measures from home and abroad failed to stop the panicky sellout in the equity market. The main Kospi finished Wednesday 4.9 percent lower at 1,591.29, the lowest since May 26, 2010. Gainers overwhelmed losers 790 to 92 as foreign investors continued to exit. Kosdaq also fell 5.8 percent to close at 485.14.

By Kim Hyo-jin

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