Bank of Korea chief watching Middle East tensions for FX, growth outlook reviews

By Howard Schneider and Cynthia Kim

WASHINGTON (Reuters) – South Korea’s central bank chief on Friday said odds for any further policy action to stabilize the slumping Korean won now depend on how events in the Middle East unfold as the bank is ready to take steps to stabilize forex markets if needed.

In an interview with Reuters, Bank of Korea Governor Rhee Chang-yong said tensions in the Middle East appeared to plateau after Iran downplayed Israel’s retaliatory drone strikes against it but geopolitical uncertainty still poses risks for the dollar-won market, as well as the country’s inflation.

Any Korean action on currency markets “probably depends on how the geopolitical tension in the Middle East evolves. At this moment I think the expectations change about the U.S. monetary policy is already priced in,” Rhee said on the sidelines of the International Monetary Fund and Group of 20 (G20) finance leaders’ meetings this week in Washington.

“Everyone is trying to deescalate the tension. I hope that it can be successful. We have to watch.”

Rhee’s comments are the latest indication of the increasing frustration felt by policymakers in emerging economies as the strengthening dollar pummels currencies across Asia.

A flurry of verbal warnings from South Korean authorities that they were ready for “stabilizing” measures against speculative moves in the dollar-won market in the past week had done little to stop the won’s slide to around a 17-month low, until a joint warning was issued for the first time following a trilateral finance dialogue by the United States, Japan and South Korea on Wednesday.

Rhee said although exports from Asia’s fourth-largest economy are “doing a lot better” than expected thanks to robust global demand for South Korean chips, the renewed Middle East tensions could both weigh on exports and push up inflation forecasts as oil prices are rising.

The BOK is expected to scrutinize how a weakening won and rising oil prices affect the economy and domestic demand, which will be taken into account as the bank updates its economic forecasts due in May, Rhee said.

Rhee also said the bank has large foreign exchange reserves and other tools ready to be deployed to respond to any market volatilities, adding to a series of verbal warnings officials made this week.

(Reporting by Howard Schneider in Washington and Cynthia Kim in Seoul; Additional reporting by Seunggyu Lim in Seoul; Editing by Andrea Ricci)