S. Korea tightens limit on forex forward positions

South Korea announced Tuesday it was lowering the ceiling on foreign exchange forward positions by foreign and local banks, to ease currency volatility after a sharp appreciation in the Korean won.

The finance ministry said local branches of foreign banks will have to limit forward deals to 150 percent of their equity capital, down from the current 200 percent.

The ceiling for domestic banks will be lowered to 30 percent from 40 percent.

The new restrictions will come into force from December 1, but with a one-month grace period, the ministry said in a joint statement with the central bank and financial regulators.

"Korea's relatively sound economic fundamentals and ample global liquidity are raising the chances that the volatility of cross-border capital movements will increase," the statement said.

"Korea plans to preemptively take action, if needed, in a bid to prevent volatility of foreign capital flows from hitting the financial market," it added.

The Korean won has gained about nine percent against the dollar since May -- a worrying trend for the country's export-driven economy which is already struggling with the impact of the downturn in its US and European markets.

Restrictions on foreign exchange forward positions were last tightened in July 2011 as capital inflows intensified.

Seoul fears that "hot money" coming into the country could exit just as swiftly -- as it did during the 1997-1998 East Asian financial crisis, which forced the country to seek IMF aid, and the 2008 global crisis.

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