South Korea to Ease FX Rules, Pump More Funds into Market

South Korea will loosen foreign exchange regulations and inject more funds into the domestic stock market in an effort to stabilize the won and broader financial system, according to a report by Korea Economic Daily. These measures aim to counter the recent sharp depreciation of the won against the US dollar and address market volatility stemming from political uncertainty and global economic headwinds.

Deputy Prime Minister and Finance Minister Choi Sang-mok announced the new measures on Monday, following a meeting with financial regulators. The government will increase the limits on forward dollar purchases by domestic and foreign banks, and expand the foreign exchange swap line between the National Pension Service (NPS) and the Bank of Korea.

"We will soon implement measures such as increasing the limits on foreign exchange forward trades and the forex swap line with the National Pension Service by the end of this month," Choi stated.

The move to relax FX rules is designed to increase dollar selling on the spot market, thereby supporting the won. The increased forward dollar purchase limits will allow banks to acquire more dollars on the forward market, while the expanded swap line will reduce the NPS's need to purchase dollars for its overseas investments.

These measures come in response to the won's sharp depreciation, which reached a more than 15-year low against the US dollar last Thursday. The currency has been under pressure from a confluence of factors, including the US Federal Reserve's hints of slower interest rate cuts, the impeachment of President Yoon Suk Yeol, and broader global economic uncertainty.

In addition to the FX measures, the government will inject an additional 300 billion won ($206 million) into the domestic stock market via a second Value-Up Fund. This fund will invest in Value-Up Exchange Traded Funds (ETFs) and stocks included in the value-up index, which tracks 100 outperforming Korean companies.

The Bank of Korea also stands ready to provide additional liquidity through repurchase agreements (repos) if necessary. Since the repeal of President Yoon's martial law declaration, the central bank has already purchased 19.6 trillion won worth of repos to stabilize the market.

The government will also loosen restrictions on foreign currency lending to domestic companies, allowing banks to extend more loans for facility spending. Previously, foreign currency lending to small- and medium-sized enterprises was tightly capped to curb foreign debt growth.