Currency Defender: Bank of Korea Threatens Capital Controls to Save the Won

The Bank of Korea (BOK) has escalated the battle to defend its currency, issuing a rare and stern warning that it may resort to capital controls if volatility in the Korean Won (KRW) continues to destabilize the economy.

The 'Nuclear Option' for FX Stability

In a statement that rattled regional markets, BOK Governor Rhee signaled that the central bank is prepared to withhold approval for major outbound investments. Specifically, Rhee explicitly mentioned the possibility of blocking the $20 billion in annual investment funds destined for the United States if the foreign exchange market remains unstable.

The Governor identified two primary drivers for the Won's recent weakness:

• Geopolitical Risk: exacerbating “safe haven” flows into the US Dollar.
• Retail Outflows: A surge in domestic investors moving capital into overseas equity markets.

The Policy Dilemma

Governor Rhee's hawkish stance on FX highlights the corner into which many Asian central banks have been painted. He noted that stabilizing the exchange rate purely through monetary policy would require an aggressive interest rate hike of 200 to 300 basis points—a move that would likely crush the domestic economy.

Instead, the BOK is pivoting to administrative tools. The central bank has reportedly already begun cooperating with the National Pension Service (NPS) to execute FX hedging operations intended to smooth volatility.

Key Data Points

• Potential Capital Block: $20 billion in annual outbound funds.
• Theoretical Rate Hike Required: 200 to 300 basis points.
• Key Currencies: KRW, USD.