Shin Hyun-song, nominee for Bank of Korea governor, said recent won depreciation has been largely driven by off-exchange trading including non-deliverable forwards (NDF) and invisible capital flows.
"It is true that the exchange rate has remained at elevated levels over the past few months," Shin said at his National Assembly confirmation hearing Thursday. "Structural factors, along with market risk aversion and changes in capital flows, are working in combination."
He noted that the recent won weakness is difficult to explain through traditional capital flows alone. "The exchange rate has risen even though domestic investors' purchases of overseas assets have not increased significantly," Shin said. "Off-balance-sheet capital flows such as NDF and other over-the-counter derivatives trading appear to have played an important role."
Shin added that during periods of financial market stress, these invisible channels can have greater influence than conventional capital movements. "In some cases, we see a phenomenon where the tail wags the dog," he said.
The nominee cited historical examples. "When the U.S. reciprocal tariff issue emerged in April last year, the dollar actually fell sharply, and we saw similar patterns during the yen carry trade unwinding two years ago," Shin said. "These cases were also significantly influenced by off-balance-sheet transactions including OTC derivatives."
Shin emphasized the need for institutional measures to enhance foreign exchange market stability. "The push for won internationalization and efforts to establish an offshore won settlement system are aimed at managing these invisible capital flows more effectively," he said.
"It is an important task to create a structure that can simultaneously satisfy exchange rate management, financial stability, and market participant convenience," Shin added. "I will closely monitor these developments."
