Key facts
- An estimated $1.5 billion in dollar demand tied to SpaceX's IPO has been cleared in South Korea.
- The Bank of Korea is implementing temporary measures to increase dollar supply and stabilize the won.
- The won has reached its weakest level since April, experiencing significant depreciation.
- Authorities are intervening by selling dollars and have adjusted reserve requirements for financial firms.
- The annual cap on foreign exchange stabilization bond issuance has been raised to $5 billion for 2026.
South Korea's central bank has announced temporary measures to increase the supply of U.S. dollars in the domestic foreign exchange market, aiming to curb the sharp depreciation of the won. The move comes as an estimated $1.5 billion in dollar demand, largely tied to foreign exchange conversions related to SpaceX's initial public offering, has been cleared. This demand had previously put significant pressure on the South Korean won.
The Bank of Korea (BOK) stated that the supply-demand imbalance in the foreign exchange market had become severe. To address this, the central bank will temporarily pay interest on financial firms' reserve deposits for foreign currency payments exceeding requirements for a six-month period starting in January. Additionally, financial firms will be exempted from making deposits to the government for holding foreign currency debt, a measure designed to ensure foreign exchange stability. The BOK also confirmed that authorities are actively intervening by selling dollars to smooth exchange rate movements.
The won has weakened considerably, hitting its lowest level since April 9 and falling more than 5% against the dollar this year. Policymakers attribute this persistent weakness to increased overseas investments by the national pension fund, retail investors, and corporations, raising concerns about potential inflationary pressures. Earlier this week, the BOK extended its currency swap line with the National Pension Service to help absorb dollar demand from the fund's international investments. The finance ministry also decided to ease currency forward caps on local banks to facilitate greater dollar supply in the onshore market.
In a related development, South Korea's parliament approved an increase in the annual cap for foreign exchange stabilization bond issuance to $5 billion for 2026, a significant rise from the government's initial proposal of $1.4 billion. The cap for 2025 was set at $3.5 billion. Meanwhile, a presidential policy adviser met with major exporting companies to discuss the foreign exchange market, warning them against profiting from the won's weakness. The Financial Supervisory Service announced it would scrutinize the business practices of financial firms that encourage overseas investment.