South Korea to inspect forex deals to check won's rise

SEOUL: South Korean officials trying to check the local currency's rise will inspect foreign exchange transactions at banks to see whether they comply with rules on derivatives, officials said Thursday.

The central Bank of Korea and the finance ministry said the eight-day joint inspection would start on April 26 and focus on banks' positions in the overseas non-deliverable forward (NDF) market.

NDFs differ from a normal foreign currency forward contract in that there is no physical settlement of two currencies at maturity.

In an NDF settlement, one party pays the other the difference between an agreed-upon exchange rate and the actual spot rate at the time of settlement, in respect of an agreed-upon notional sum.

Heavy selling of the dollar by offshore players, largely via the NDF market, has helped pushed up the won in recent weeks.

It has gained about five percent against the greenback so far this year and hit a 13-month high near 1,080 to the dollar Thursday, prompting authorities to intervene in the market.

Officials believe an excessively strong won will damage export competitiveness, although some analysts say it should be allowed to rise freely to ease imported inflation.

Dow Jones Newswires said at least four banks -- two domestic and two local branches of foreign banks -- would be inspected.

It quoted an unnamed financial official as saying: "A significant portion of forwards position changes among the banks have been through NDFs, so the regulator wants to take a closer look at that particular aspect and see if there are any major issues."

South Korea introduced curbs on currency-derivative positions last June, hoping to keep Asia's fourth-largest economy from rapid capital flows that can cause financial instability.

From August 1 it will also impose a levy on banks' offshore borrowing as part of a campaign to stem speculative foreign capital inflows which help push up the won.

Seoul fears that "hot money" coming into the country could exit just as swiftly as it comes in -- as it did during the 1997-1998 East Asian financial crises and the 2008 global crisis.