Korean Won Soars! Exchange Rate Defense Battle Fully Upgraded

The Bank of Korea and the Ministry of Finance of Korea jointly stated on Wednesday that several meetings have been held over the past two weeks to discuss the recent depreciation of the Korean won. The Ministry of Finance also announced that it will implement several new tax measures to stabilize the foreign exchange market.

After the above message was released, the Korean won briefly jumped 1.4%, rising to 1,460.00 won against the dollar. Previously, the won had depreciated to 1,485 won per dollar on Tuesday, approaching its lowest level since the 2009 global financial crisis.

South Korean authorities demonstrate their "firm determination".

The Korean Ministry of Finance announced that it will introduce a new tax incentive plan for repatriated investment accounts to encourage overseas investment capital to return to the domestic market.

According to the latest relevant plan, South Korean individual investors will receive a temporary exemption from income tax on the gains from selling overseas stocks if they convert the proceeds into Korean won and invest in domestic stocks for the long term within one year.

In addition, the South Korean government will support large securities firms in quickly launching forward sales products aimed at individual investors, as many retail investors currently lack sufficient foreign exchange risk management tools. The South Korean Ministry of Finance also stated that in order to reduce the double taxation of dividends received by domestic parent companies from overseas subsidiaries, the dividend income exclusion rate will be increased from the current 95% to 100%.

Currently, South Korean authorities are making every effort to curb the depreciation of the won. Officials are easing foreign exchange controls to increase the liquidity of dollars within the country, seeking cooperation from major exporters, and intensifying efforts to alleviate the pressure from residents' demand for overseas investments.

Earlier this month, the Bank of Korea signed a foreign exchange swap agreement with the National Pension Service with a limit of $65 billion. The Bank of Korea also decided to temporarily exempt banks and other financial institutions from the foreign exchange stability tax starting next month and will pay interest on the statutory foreign exchange reserves held by financial institutions.

The currency defense battle has reached a critical moment.

At the time of the latest tough stance from the South Korean authorities, the exchange rate of the US dollar against the South Korean won is approaching the psychological barrier of 1500—this level has only been breached during the 2008 global financial crisis and the 1997 Asian financial crisis. Despite the authorities having employed a range of conventional defensive measures in recent months, the won continues to be under pressure.

It is reported that the National Pension Service of Korea has begun selling U.S. dollars to support the exchange rate of the Korean won, and Korean brokerage firms have decided to suspend new marketing activities for overseas stocks.

Since the end of June, the Korean won has depreciated by over 7%, making it the second worst-performing currency in Asia during the same period.

Despite the booming semiconductor exports in South Korea, concerns about foreign capital withdrawal, domestic investors investing abroad, and additional investment in the US (as part of tariff negotiation plans) could put pressure on the Korean currency market, all contributing to the selling wave of the Korean won.

The economist from Shinhan Bank analyzed, "The Korean won is currently so weak that relatively distant negative factors, such as France failing to reach an agreement on next year's budget and concerns about the downgrade of France's credit rating by Europe, have impacted it. This is because the Korean won is very sensitive to negative news, while not very sensitive to positive news."

"Currently, South Korea's foreign exchange management authorities are determined to set a cap on the USD/KRW exchange rate by the end of the year. However, if no other factors drive the exchange rate down, the Korean won is likely to remain between 1470 and 1480 won in the short term."

It is worth mentioning that South Korea is not the only Asian country seeking support for its currency this week.

Japan's Finance Minister Shunichi Suzuki stated earlier this week that Japan "has ample room for action" to take bold measures against exchange rate fluctuations that are inconsistent with fundamentals. This was her strongest warning to speculators so far. Suzuki made these remarks amidst renewed market speculation that the Japanese Ministry of Finance may directly intervene in the foreign exchange market.