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BOK warns against possible volatility of foreign stock fund flows

South Korea's central bank on Thursday warned against a possible expansion of volatility in foreign stock fund flows as uncertainty over external economic conditions persists.

Foreign capital has been flowing into South Korea as Asia's fourth-largest economy has been largely unfazed by financial market jitters in some emerging nations due to its relatively strong economic fundamentals. Foreigners extended their net buying binge for a record 44th straight session on Wednesday.

The Bank of Korea (BOK) said in its semi-annual financial stability report that there is a possibility that the volatility of foreign stock fund movements is expected to temporarily expand as uncertainty over external economic conditions lingers.

"Foreign stock funds are likely to post net inflows into Korea for the time being due to Seoul's sound economic fundamentals, but volatility of such capital can increase, given high uncertainty in the global financial markets," the report said.

The BOK also said that the recent inflows of short-term foreign stock funds could be reversed for profit-taking if economic situations at home and abroad change.

The central bank added that foreigners' bond funds are likely to post net outflows from the Korean market as demand for debt may be eased amid potential reduction in global liquidity.

The report came as the Korean currency has been under upward pressure against the U.S. dollar amid a sustained influx of cross-border foreign capital funds. The won has appreciated more than 5 percent to the greenback since mid-May.

But excessive inflows of foreign funds are also causes for concern to Korean policymakers as they can easily exit from the Korean market if external economic conditions quickly change.

Touching on emerging market jitters, the BOK said that such market unrest is unlikely to develop into financial crises across emerging nations.

But the bank also added that it cannot discount the possibility of such market jitters spreading to Korea if an expected reduction in the U.S. bond-buying program spurs excessive capital outflows from emerging markets. (Yonhap News)



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