"Participation of Foreign Exchange Market by Korea Focuses More on Financial Stability than Maintaining Export Competitiveness"

Exchange Rate Volatility Reduced by 0.003%P When Participating in Foreign Exchange Market with $100 Million

[Asia Economy Reporter Kim Eunbyeol] It has been revealed that South Korea's foreign exchange market operations (participation) were driven more by the purpose of stabilizing the market in response to temporary exchange rate shocks rather than maintaining export price competitiveness. Although the U.S. Department of the Treasury continues to classify South Korea as a monitoring country due to its current account and trade surplus with the U.S., in reality, South Korea has more often intervened in the foreign exchange market to ensure financial stability.

The government maintains the principle of "smoothing operation," which allows exchange rate fluctuations to be left to the market but makes fine adjustments only when there is a sharp imbalance.

According to the Bank of Korea's "BOK Economic Research - Behavior of South Korea's Foreign Exchange Market Operations and Their Effect on Exchange Rate Volatility Mitigation" released on the 3rd, South Korea's foreign exchange market participation generally aimed not at pursuing a specific target exchange rate but at mitigating sharp exchange rate fluctuations.

In particular, during periods including financial crises, it is estimated that the market responded sensitively to won depreciation, while in periods excluding financial crises, it responded sensitively to won appreciation. This is interpreted as flexible execution of foreign exchange market participation according to market conditions.

Foreign exchange market participation was also analyzed to have a significant effect on reducing exchange rate volatility. When foreign exchange market participation occurs in units of 100 million dollars, exchange rate volatility is reduced by 0.003 percentage points. Especially in the 80?99% volatility quantile, where volatility is highest, the exchange rate stabilization effect is analyzed to increase to about 0.01 percentage points.

Furthermore, since the effect of foreign exchange market participation lasts only in the short term (1?2 months), this measure was effective in resolving market imbalances caused by temporary exchange rate shocks.

Park Junseo, Senior Research Fellow at the Bank of Korea's Economic Research Institute, International Economics Research Division, stated, "The finding that foreign exchange market participation reduced the volatility of the won-dollar exchange rate partly reflects that the foreign exchange authorities’ commitment to mitigating exchange rate volatility was well communicated to economic agents." He added, "Going forward, it is necessary to pay more attention to clearer signal transmission and the central bank’s trust management."

This content was produced with the assistance of AI translation services.