Gov`t to Inject Dollars to Stabilize FX Rate

Foreign reserves will be released to stabilize the foreign currency market, which has fluctuated due to the European fiscal crisis and escalating inter-Korean tension.

The government will also prevent banks from taking out excessive dollar loans by limiting forward exchanges between companies and banks.

Vice Strategy and Economy Minister Yim Jong-ryong told a joint meeting of economy and finance ministries Wednesday, “The government will check the capital markets and provide sufficient foreign liquidity to prevent market jitters.”

For sufficient dollar liquidity, one idea is the injection of dollar reserves into foreign currency swap markets where the won and the dollar are exchanged.

Certain banks that mediate between the government and the market will be allowed to exchange the won with the dollar when necessary.

The Bank of Korea could also inject foreign currency directly into the market through bidding. Providing guarantees to banks’ foreign-denominated debts is also under consideration.

Warning of rising market jitters due to an increase in the amount of forward exchange contracts, the Strategy and Finance Ministry will strengthen the forward exchange limit, which is set at 125 percent of a company’s export earnings. Forward exchange contracts allow companies to sell dollars to banks at a fixed rate on a set date.

In addition, banks will be prevented from increasing loans by taxing short- and long-term debts such as foreign currency borrowings.

Strategy and Finance Minister Yoon Jeung-hyun told a risk management meeting, “We are devising measures to ease volatility in capital flight according to scenario.”

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