Korea's 24-hour Forex Market Opens: Balancing Access with Volatility Control

24-hour foreign exchange trading must not weaken volatility controls

Korea's expanded weekday foreign exchange trading promises better access and efficiency, but authorities must guard against overnight volatility and speculative attacks.

Beginning Monday, Seoul's foreign exchange market will operate on a 24-hour weekday trading schedule, marking a significant step toward aligning Korea's currency market with global standards. The transition should improve market efficiency and accessibility. Yet with the won-dollar exchange rate recently climbing above 1,550 won during intraday trading, the government and financial authorities must remain especially vigilant against heightened volatility.

The most immediate benefit is greater convenience for market participants. Until now, Korean companies and individual investors often struggled to exchange currencies or manage foreign exchange risk after the domestic market closed. Extended trading hours will allow exporters and importers to execute transactions when needed while reducing currency conversion costs for investors trading overseas stocks.

The reform is also expected to lessen the long-standing phenomenon in which the offshore nondeliverable forward (NDF) market disproportionately influences the onshore exchange rate, effectively allowing "the tail to wag the dog." Continuous trading should enable the market to absorb overnight global developments in real time, reducing the sharp opening-day swings that have resulted from accumulated external shocks.

The new system, however, also introduces fresh risks. During late-night hours, when trading volume is much thinner, even relatively minor news or modest transactions could trigger outsized exchange-rate movements because of limited liquidity. Rather than being concentrated at the market opening, external shocks could spread throughout the trading day.

Persistent foreign investor selling and continued dollar strength are already adding to exchange-rate volatility. A more open foreign exchange market could also create new opportunities for overseas speculative capital seeking to profit from market fluctuations.

The experience of financier George Soros's 1992 attack on the British pound serves as a reminder that economies with weak fundamentals or slow policy responses can become targets for international speculators. Korea should keep that lesson firmly in mind.

Korea's foreign exchange reserves rose by $370 million in June from the previous month to $427.4 billion, but the country nevertheless slipped one place to 13th in the global rankings. That underscores the need to strengthen the foreign exchange safety net so that speculative capital finds no opening.