Foreign Exchange Authorities: "Macroprudential Measures for Financial Institutions Considered if High Exchange Rate Persists"

"Bessent's Unusual Remarks on the Won Reflect U.S. Investment Concerns"
"Domestic Excess Demand Driving Offshore Transaction Behavior"

Regarding the sharp rebound of the won-dollar exchange rate within a day after the U.S. Treasury Department's supportive remarks on the Korean won, the government stated on January 15 that "domestic excess demand is driving the behavior of offshore transactions." The government also indicated that if the high exchange rate situation persists, it may consider macroprudential measures to manage capital flows.

Choi Ji-young, Deputy Minister for International Economic Affairs at the Ministry of Economy and Finance, made this assessment during a background briefing on recent developments in the foreign exchange market held at the Government Complex Sejong that afternoon. She was referring to the situation in the foreign exchange market from the previous night, when the U.S. Treasury Secretary made verbal intervention-like remarks, up until the present.

Choi explained, "As soon as the market opened, there was a significant demand for dollars, mainly driven by securities firms' overseas investments," and pointed out, "While offshore foreigners agree with the U.S. Treasury Secretary's assessment that there is a disconnect between Korea's fundamentals and the exchange rate, domestic investors see the exchange rate as a buying opportunity." This means that excessive overseas investment by retail investors and speculative demand for dollars betting on a weaker won are driving the exchange rate higher.

Due to verbal intervention measures by U.S. Treasury Secretary Scott Bessent, the won-dollar exchange rate plummeted to the 1,460 won range in overnight trading, but after the regular session opened that day, it climbed back to the 1,470 won range.

Choi added, "We expect that policies such as the National Pension Service's new framework or the return of domestic market accounts could help stabilize the exchange rate." However, she also stated, "If these measures are implemented but have little effect, we may consider macroprudential measures to restore and maintain macroeconomic stability."

She noted that in the past, when the won was excessively strong, the government announced three types of macroprudential policies, such as imposing a foreign exchange levy on banks and setting forward position limits. She suggested that new macroprudential policies tailored to the current weak won situation could be introduced.

Regarding the possibility of considering regulations on individual investors, she said, "We are not directly considering such measures," and clarified, "Macroprudential measures target financial institutions," adding, "We believe that measures aimed at financial institutions can ultimately change and guide the trading behavior of individuals."

She also explained that Secretary Bessent's statement that the rapid depreciation of the won does not match Korea's economic fundamentals reflects the importance of a stable won in bilateral economic cooperation, such as investment in the United States following the results of the Korea-U.S. tariff negotiations.

Choi further stated, "Secretary Bessent directly expressed his opinion via his personal social networking service (SNS), and the U.S. Treasury Department distributed related materials for this reason." She added that Secretary Bessent expressed expectations that the Korea-U.S. Strategic Investment Memorandum of Understanding (MOU) would proceed smoothly and that the economic partnership between the two countries would deepen.

She continued, "We have continuously conveyed to the U.S. Treasury Department that increased volatility and instability in the foreign exchange market could limit the implementation of investments in the United States."