Internationalizing the won has long been treated as an unattainable goal in South Korea's foreign exchange market. Pessimism prevailed because the won carried little weight in global payment markets, making demand hard to find, and because the dollar's dominance was expected to last for a long time.
That pessimism began to crack this year. Korea's standing in global trade started to shift in the wake of the semiconductor boom. "There were measures to improve access this year, including entry into the World Government Bond Index and the move to round-the-clock foreign exchange trading, but above all, the memory chip bottleneck has made Korea a country that is hard to ignore," a senior government official said. "When a country's power grows, the standing of its currency changes as well." In other words, a currency that once had no presence is beginning to build muscle.
The dollar's once-ironclad dominance is also showing signs of strain. The dollar's share of global central bank foreign exchange reserves fell to 56% last year from 64% in 2015, an 8 percentage point drop, according to the Federal Reserve Bank of New York. Central banks are turning to other currencies and assets instead of the dollar. China and Russia, both at odds with the United States, are leading the shift. Chronic U.S. fiscal deficits are another factor undermining the dollar's grip. Experts say the dollar's dominance will not collapse anytime soon, but the global monetary order could gradually move from a single-pole system to a multipolar one.
Against that backdrop, the rise in overnight foreign exchange derivatives trading can be read as a positive signal for internationalizing the won. Offshore investors previously relied on the non-deliverable forward (NDF) market, where they hedged currency risk by settling gains and losses in dollars without any actual won changing hands, because the Seoul foreign exchange market was closed overnight. With round-the-clock trading, offshore players can now carry out deliverable forward (DF) and foreign exchange swap transactions in the domestic market overnight without restrictions, laying the groundwork to broaden real demand for the won.
Experts say the effort should not stop there, calling for follow-up measures to expand liquidity so that offshore investors can trade and settle in won freely and easily at any time. With geopolitical conflict intensifying, some argue Korea needs a comprehensive "currency plan" to build the won's international influence.
Absorbing demand that had relied on offshore NDFs into domestic derivatives trading could also reduce exchange rate volatility. Bank of Korea Governor Shin Hyun-song has described the way overnight offshore NDF trading significantly moves the spot rate as a case of the tail wagging the dog. Foreign exchange authorities believe that a decline in NDF trading volume will likely reduce the abnormal swings in the exchange rate the following day.
Still, experts note that simply pulling NDF demand into the onshore market does not complete the internationalization of the won. They advise that trading demand must flow steadily into the onshore derivatives market, and that liquidity must be deepened and trading made more convenient so that foreign financial institutions can buy and sell won comfortably even in the predawn hours.
Foreign exchange authorities are indeed building an offshore won payment network following the move to 24-hour trading, and are reviewing a plan to offer incentives when NDF trades are converted into DF transactions. "Going forward, the focus of won internationalization should be on whether won liquidity of sufficient size and depth actually forms, rather than on opening the system or building infrastructure in itself," said Kim Han-soo, a senior research fellow at the Korea Capital Market Institute.
Others say Korea should take a wider view and draw up a master plan to raise the won's international standing in line with the weakening of the dollar-centered monetary order. The dollar's dominance will not crumble immediately, but with major economies pursuing strategies to diversify their reserves, Korea should use the opening to broaden the won's reach, they say.
"Over the medium to long term, what matters is creating incentives for foreign companies and financial institutions to go beyond using the won as a means of settlement and to hold and reuse the won they receive," said Han Jae-joon, a professor of finance and management at Inha University. "Korea needs to expand won settlement within Korea-centered supply chains and strengthen the network effects of won usage by growing won-denominated trade finance and markets for won-denominated financial assets."