June volatility reaches 1.5% through Tuesday, up 0.5 percentage point from May
Foreign net selling compounded by NDF speculation
Weak-won bets drive dollar demand, pushing exchange rate higher
Overnight NDF activity spills into domestic market at open
Authorities weigh tighter NDF oversight, DF market migration
Won internationalization could eventually render NDF irrelevant
![Employees work at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Wednesday. [Yonhap]](https://wimg.heraldcorp.com/news/cms/2026/06/10/rcv.YNA.20260610.PYH2026061004010001300_P1.jpg)
By Kim Byeo-ri, The Herald Business
South Korean foreign exchange authorities have singled out the non-deliverable forward market as the primary driver of the won's recent one-sided slide, signaling an aggressive response on the grounds that the current high exchange rate cannot be explained by economic fundamentals or supply-and-demand factors alone.
South Korea's current-account surplus reached a record $102.67 billion through April this year, financial industry sources said Wednesday, buoyed by strong semiconductor-led exports. First-quarter real GDP growth was revised up consecutively to a preliminary 1.8%, and some analysts now forecast annual growth of around 3%. Under normal conditions, a booming economy draws in foreign currency and pushes the exchange rate lower.
Sustained foreign net selling of domestic equities has clearly added upward pressure on the won-dollar rate. Net selling means investors sold more shares than they bought; as foreign investors convert the won proceeds from those sales into dollars, the exchange rate rises. On Tuesday, foreigners net sold 1.9850 trillion won (about $1.31 billion) worth of domestic shares, extending their net selling streak to 22 consecutive trading sessions.
Even so, authorities believe the current exchange rate trajectory is excessive. When foreign net selling pushes the rate up, NDF speculators pile on by betting on further won weakness, adding more upward pressure — which in turn inflates investor expectations of continued depreciation, creating a vicious cycle. Volatility has widened accordingly. The average intraday high-to-low range this month through Tuesday reached 1.5%, up 0.5 percentage point from May's 1% and the highest level this year.
The NDF was originally introduced to help hedge currency risk for emerging-market currencies facing capital flow restrictions. When the won had limited exposure in global foreign exchange markets, the NDF played a broadly positive role by giving foreign investors a hedging tool and helping activate the market. Today, however, speculative trading dominates NDF activity. Market estimates suggest that 60 to 80 percent of NDF transactions are speculative in nature.
In simple terms, an NDF is an offshore contract in which parties bet on where the exchange rate will be at a future date. A typical transaction involves agreeing today to buy or sell dollars at the current rate one month from now. If the rate rises by then, the dollar buyer profits by locking in a cheaper price; the dollar seller takes a loss. The reverse holds if the rate falls.
Crucially, NDFs settle in cash — only the difference between the contracted rate and the actual rate changes hands, with no physical exchange of currencies. If the rate moves from 1,500 won to 1,600 won per dollar, for example, only the 100-won difference is paid out. This structure allows speculators to build large positions with relatively little capital, making it easy for them to scale up quickly.
When demand for dollars — effectively bets on won weakness — builds in the NDF market, foreign bank branches operating in South Korea buy dollars in the domestic spot market to hedge their exposure. That additional dollar demand in the spot market pushes the exchange rate even higher.
The NDF's influence peaks in the early morning hours. Unlike the domestic foreign exchange market, which operates from 9 a.m. to 2 a.m. the following day, the NDF market runs around the clock. Between 2 a.m. and 9 a.m., when the domestic market is closed, NDF moves have an outsized effect on the rate. The window up to 6 a.m. — when the New York session is open — is the most active period.
The result is that exchange rate pressure built up in the overnight NDF market transfers directly into the domestic market the moment it opens. This is the dynamic Bank of Korea Governor Shin Hyun-song has repeatedly described as "the tail wagging the dog."
Authorities have declared an all-out offensive against the NDF market and are weighing a range of countermeasures.
The first priority is tightening oversight of NDF activity. Because NDF transactions occur offshore, direct monitoring has its limits, but authorities plan to manage the market indirectly through the foreign bank branches that link the NDF and domestic spot markets. In that vein, the Bank of Korea and the Financial Supervisory Service launched inspections Wednesday targeting foreign exchange banks suspected of manipulating or fixing exchange rates for improper gain or to benefit third parties.
Authorities are also pursuing a plan to migrate NDF trading into the domestic deliverable forward, or DF, market. Unlike the NDF, the DF market involves actual currency exchange at maturity and is conducted within the domestic foreign exchange system, limiting the scope for leveraged speculation and large-scale positioning. It also brings transactions within the regulatory line of sight. Authorities are reportedly considering price incentives to encourage the shift, and market participants say the key challenge will be making those incentives attractive enough to draw NDF players into the DF market.
Over the longer term, won internationalization may offer the most fundamental solution. The Federal Reserve Bank of New York noted in a past report that NDF markets "tend to disappear naturally once full currency convertibility is assured." If the won were freely exchangeable anywhere in the world — like the dollar, euro or yen — the NDF market's influence would diminish on its own.
Governor Shin, who took office in April, has consistently championed won internationalization, calling it "an important task to build monetary infrastructure befitting the status of our economy." The Bank of Korea plans to extend domestic foreign exchange market hours to 24 hours starting in July and intends to establish an offshore won settlement system as well.
kimstar@heraldcorp.com
