Because of the Middle East war, the won-dollar rate swung in the offshore market, the New York non-deliverable forward (NDF) market. An NDF is a contract that promises to buy or sell at a set rate at a specific time, a type of forward. Only the difference between the contracted rate and the spot rate at maturity is transacted, and because of this feature, foreign investors often use it for hedge (risk avoidance).
The view is that the sharp moves in the rate in the New York NDF market stemmed from Middle East war news reports airing at night Korea time. Because of this, analysts say the won-dollar rate also swung in regular transactions on the Seoul foreign exchange market, which open after the New York NDF market closes.
According to Yonhap Infomax on the 19th, the gap between the fair NDF rate—based on last month's closing price during regular transactions (9 a.m.–3:30 p.m.) on the Seoul foreign exchange market—and the final 1-month dollar-won NDF quote in the actual New York NDF market averaged 12.2 won per day. The fair NDF is calculated by factoring the interest rate differential between countries into the regular-transaction close. It was the widest difference in 5 years and 3 months since Dec. 2020 (49.3 won). At that time, as COVID-19 vaccines rolled out and expectations grew that the pandemic would end, the global financial market overheated and the foreign exchange market expanded.
The divergence between the two gauges is seen as the result of Middle East–related news being reported at night Korea time and the NDF market reacting immediately. News such as U.S. President Donald Trump's war-related remarks or reports on Iran's Hormuz Strait offensives came overnight Korea time. Because NDFs are transacted in the New York market, they moved right away on such external factors.
Analysts say the wider onshore-offshore rate gap overnight was reflected intact in the next day's regular transactions on the Seoul foreign exchange market. Last month in the Seoul FX market, the won-dollar opening rate differed from the prior day's close by an average of 10.8 won. Volatility was the highest since May 2010 (11.4 won), when the eurozone fiscal crisis occurred.
In this regard, on the 15th, Shin Hyun-song, nominee for Bank of Korea governor, pointed to offshore transactions, including NDFs, as a major cause of exchange-rate volatility during his confirmation hearing. Shin said, "There seem to be many off-balance-sheet derivatives transactions, leading to a 'tail wagging the dog' phenomenon." He added, "We need to build liquidity through the internationalization of the won and establish systems within a macroprudential framework," and "we should legalize the currently hard-to-monitor NDF market and bring it under the system."