South Korea said on Friday it would inject $10 billion or more into the swap market over the next several weeks to ease a persistent dollar-funding squeeze in the face of lingering doubts about an early end to the global financial turbulence.
The Finance Ministry's most influential foreign exchange official announced the plan to intervene in the local dollar/won swap market hours after Minister Kang Man-soo pledged to deal with the foreign currency liquidity problem pre-emptively.
The costs of dollar funding fell after the latest pledges from top officials, but the won remained edgy as traders awaited more progress in the US effort to rescue Wall Street.
"The foreign currency money market is experiencing a serious squeeze because of the turbulent international financial markets. (The government) has decided to supply dollars aggressively," Choi Jong-ku, head of the ministry's international finance bureau, told reporters.
He said the central bank would also continue to supply dollars whenever necessary. The Bank of Korea manages the country's more than $240 billion foreign reserves and has said publicly it was intervening in the swap market, but the finance ministry has the final say in South Korea's foreign exchange policy.
In the local dollar/won swap market, the cost of one-month dollar funding fell to as low as 2.0 won in early afternoon from 3.5 won in the morning and as high as 10.0 won earlier this week. But traders remained nervous in the cash market and the won, which shed 7 percent this month alone to hit a 4-year low of 1,166.9 per dollar on Thursday, was little changed from Thursday's domestic close of 1,158.2.
Choi's remarks came hours after Minister Kang Man-soo reiterated the government's commitment to helping the swap market regain stability. "The authorities will deal with troubles in the foreign exchange money markets even before the troubles grow serious," Kang said during a weekly meeting of senior financial officials.
Officials at the finance ministry, the central bank and the financial regulatory agency have made statements in recent weeks aimed at soothing traders suffering from dollar shortages.
South Korea had some $220 billion of external debt coming due within one year, according to central bank data. A large part of the total is owed by local branches of foreign banks and would not have to be shouldered by the government even in an insolvency.
But the rising costs of dollar-funding could still pull the won down, raising the local prices of imports and making investment in the country less attractive. Foreign investors have already sold a record 28.6 trillion won ($24.7 billion) worth of local shares this year, partly because the global financial turbulence persuaded them to convert as much of their assets as possible into cash.
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