Shadow boxing with currency speculators

Ha Hyun-ock

The author is an editorial writer at the JoongAng Ilbo.

The government appears obsessed with the specter of speculators. This time, the target is the foreign exchange market.

After the won-dollar exchange rate climbed above 1,560 won, monetary authorities pointed to currency speculators as a major cause of the surge. While foreign investors taking profits in the domestic stock market and purchasing dollars contributed to the rise, officials argued that speculative trades amplified one-sided market movements.

This is not the first time authorities have searched for culprits. When the won weakened sharply late last year, retail investors buying overseas stocks and the National Pension Service were blamed for pushing the exchange rate higher. Policymakers even promoted programs designed to lure overseas-focused investors back into the domestic market. Yet despite a strong Kospi rally that drew both retail investors and pension funds toward Korean equities, the exchange rate did not easily return to previous levels.

The war in the Middle East has provided authorities with a convenient explanation for the won’s weakness. Through last month, foreign investors sold more than 118 trillion won ($79.2 billion) worth of Korean stocks, driving capital outflows and pushing the exchange rate higher. Authorities appeared unable to stop foreign investors from buying dollars and moving money overseas, even while Korea sought inclusion in the MSCI Developed Markets Index. Now, after seeming powerless against foreign-driven market pressures, they have turned their attention to alleged currency speculators.

Their determination is clear. Authorities have vowed to crack down on currency speculation and illegal foreign-exchange transactions. The Financial Supervisory Service and the Bank of Korea are even conducting a joint foreign-exchange inspection for the first time in 14 years.

Such rhetoric suggests the existence of organized market manipulation. One might expect activity resembling the famous currency attacks carried out by investors such as George Soros against the British pound in 1992. Yet the examples cited by authorities are difficult to view as evidence of serious market distortion.

One practice identified as potentially problematic is the use of lead and lag strategies by importers and exporters. These involve accelerating or delaying dollar payments and receipts based on exchange-rate expectations. Authorities argue that companies seeking foreign-exchange gains can worsen supply-demand imbalances by paying import bills early or delaying the receipt of export proceeds.

From the government’s perspective, every dollar matters. But for businesses engaged in international trade, such actions are standard risk management. If an importer expects the won to weaken, paying earlier reduces future costs. If an exporter expects a weaker won, delaying collection may increase returns. Labeling these efforts to minimize losses and maximize profits as market disruption or illegal conduct is a questionable approach.

Taken to its logical conclusion, the authorities’ argument could turn ordinary market participants into speculators. Someone who buys dollars after reading news reports about gains in the offshore non-deliverable forward market could fall under suspicion. Even individuals opening dollar-denominated deposit accounts might be viewed as participants in speculation.

This “speculator frame” evokes memories of earlier campaigns against perceived villains in the housing market. Policymakers once declared war on real-estate speculation, casting owners of multiple homes and even some owners of a single nonresident property as culprits. In both housing and foreign exchange, authorities appear reluctant to acknowledge structural causes. Instead, they search for scapegoats while treating every uncomfortable price movement as someone else’s fault.

The recent rise in the exchange rate is certainly concerning. Yet the average annual won-dollar rate has been climbing steadily since 2021. That trend points to weakening economic fundamentals. Potential growth has slowed, productivity has declined and Korea has become increasingly entrenched in a low-growth environment. Rising government debt has further weighed on the value of the won. At the same time, overseas investment by households and businesses has expanded, creating persistent demand for dollars.

The semiconductor boom may temporarily improve market conditions, but it cannot conceal deeper challenges indefinitely. Beyond short-term supply-demand adjustments, policymakers need long-term solutions that address the economy’s structural weaknesses.

Perhaps the greatest distortion in the foreign-exchange market is not speculation itself but the authorities’ fixation on finding speculators. Like a boxer throwing punches at an invisible opponent, policymakers risk engaging in shadow boxing against imaginary enemies. Misdiagnosing the problem and prescribing the wrong remedies may only worsen the situation, making recent claims that the weak won reflects a “paradox of success” ring hollow.