Bank of Korea Governor Rhee Chang-yong delivers his New Year's address at the Bank of Korea's New Year's ceremony on the 2nd. [Photo=Yonhap News]

The market's reaction to the Bank of Korea's explanations is not unusual, as the won-dollar exchange rate has been fluctuating in the late 1440 won range recently.

The Bank of Korea repeatedly states its position, saying, "The current exchange rate level does not reflect economic fundamentals" and "Market functions are operating normally." However, the foreign exchange market and investors perceive it differently.

The issue is not the exchange rate level itself, but rather that market confidence in the Bank of Korea's judgment criteria has hit rock bottom.

The Bank of Korea has traditionally emphasized its principle of not setting specific exchange rate numbers as defense lines. Instead, it explains that it uses factors such as volatility, supply and demand structure, divergence from fundamentals, and the normalcy of market functions as comprehensive judgment criteria.

However, these criteria share a common weakness: quantitative standards are not disclosed.

It is impossible for outsiders to verify how much volatility is "excessive," which combination of indicators constitutes a "divergence from fundamentals," and when that judgment is resolved.

This way of explaining things results in weakened trust the more it is repeated during times of crisis.

Even in a high exchange rate environment, the Bank of Korea states that "fundamentals are sound," yet at the same time, intervention that is interpreted as smoothing operations is repeatedly detected in the foreign exchange market.

As the perception builds that the official message is stability but the actual actions are close to defense, the market has begun to interpret the situation based on the Bank of Korea's actions rather than its words.

In particular, distrust has grown with the recent explanation that exchange rate fluctuations are due to "pension fund overseas investments and genuine demand."

Increased overseas investment by pension funds or demand for import payments are not new variables but structural factors already inherent in the market. Nevertheless, if the exchange rate reacted sensitively at a specific point in time, the market interprets this as a problem of management capability.

The explanation "due to genuine demand" is perceived not as an identification of the cause, but as an admission of uncontrollability.

Another factor is the temporal structure of the explanations.

The Bank of Korea's messages are generally retrospective. The pattern of explaining "excessive movements" and "divergence from fundamentals" after the exchange rate has changed rapidly is repeated.

On the other hand, what the market desires is a preemptive guideline on how far things could potentially go in the worst-case scenario and under what conditions intervention will be strengthened.

As this gap does not narrow, the perception that "the Bank of Korea's explanations are always late" is becoming entrenched.

This distrust is not just an emotional issue but is leading to actual investment behavior.

Recently, movements such as avoidance of won-denominated assets, preference for dollar holdings, and caution regarding short-term exchange rate peaks are simultaneously appearing in the market.

This is less about conviction on the direction of the exchange rate and more about defensive choices made due to weakened confidence in policy signals.

Ultimately, the core issue is not whether the exchange rate is 1450 won or 1430 won.

It is the loss of predictability regarding the Bank of Korea's judgment criteria and the timing and method of its responses.

The market is reacting conservatively not because it exaggerates crises, but because it cannot ascertain the criteria.

The challenge facing the Bank of Korea is not to explain the exchange rate, but to restore a structure where explanations lead to trust.

Otherwise, the word "stable" is likely to lose its persuasiveness the more it is repeated.

By Reporter Kim Young