Bank of Korea Nominee Shin Hyun-song Highlights Complex Structural Shifts in Currency Volatility
Why have currency rates been fluctuating so frequently lately? Bank of Korea Governor Nominee Shin Hyun-song analyzed that the recent volatility in the foreign exchange market stems from complex factors that cannot be explained solely by simple trading of foreign currency (spot supply and demand) or domestic transactions. He stressed the importance of understanding these currency rate changes comprehensively.
Shin stated that attention needs to be paid to the structural changes in international financial markets since the 2008 global financial crisis. He pointed out limitations in explaining capital flows and currency fluctuations as bank-centric financial intermediation has weakened and the role of non-bank financial institutions has expanded. Understanding changes in non-banks' portfolio adjustments, bond investment flows, and off-market derivative positions like FX swaps has become increasingly important, he added.
Shin analyzed that while factors contributing to the rise in the dollar-to-won exchange rate in the fourth quarter of last year included fluctuations in domestic and foreign foreign exchange supply and demand, such as increased overseas investment by residents, recent influences on the exchange rate have been shifts in global risk appetite leading to foreign investors selling stocks (domestic) and movements in offshore derivatives.
Shin suggested that the channels through which changes in risk appetite propagate to foreign exchange and financial markets should be examined, and macroprudential policies should be operated flexibly to prevent excessive risk accumulation in vulnerable sectors.
Shin assessed that South Korea's foreign exchange sector's vulnerability has been complemented through the introduction of policies such as forward transaction position limits and foreign exchange stabilization levies since the global financial crisis, leading to significant improvements in external soundness, including the transition to a net external financial asset country. He stated that foreign exchange reserves will be managed at a level that can serve as a buffer against external shocks to maintain robust external payment capabilities.