Bank of Korea to Inject Dollars via Open Bidding

The Bank of Korea yesterday said it will provide U.S. dollars to commercial banks via an open bidding system. The National Pension Service will also purchase up to 10 trillion won (7.5 billion U.S. dollars) worth of bank-issued and prime corporate bonds this year.

The decision is expected to provide much-needed dollars to commercial banks, which have suffered from a lack of dollars and won.

The central bank said it will provide dollars into the nation’s won-dollar swap market via an open bidding system. Boosted by the announcement, the won-dollar exchange rate fell 39 points to close at 1,334.

A dollar auction will come every Tuesday and additional auctions will be held when necessary. Before the decision, the bank had intervened in the market by injecting dollars in a market participated in by unspecified banks. Under the former system, banks in dire need of dollars often failed to secure greenbacks.

Ahn Byeong-chan, director of the central bank’s international department, said, “We will provide two billion to three billion dollars to mature in three months at the first bidding Tuesday. We’ll determine how many dollars to provide in the next bidding after closely watching market conditions.”

Kim Seon-jeong, director of the pension fund’s fund management department, said, “Government bonds set to mature in the near term will be replaced with prime corporate and bank bonds rated ‘AA’ or above. The pension fund will probably buy bonds up to 10 trillion won.”

Domestic bonds owned by the pension fund are worth 158 trillion won (118 billion dollars), with financial bonds accounting for 25 percent and corporate bonds five percent.

On the stock market, the benchmark KOSPI index fell 33.11 points (2.73 percent) to close at 1,180.67, a new low since 1,158.11 on Oct. 31, 2005.

As U.S. stocks rebounded, the KOSPI jumped 31 points shortly after it opened, but closed below 1,200 as foreign and institutional investors rushed to sell Korean stocks toward the end of trading.

parky@donga.com corekim@donga.com