Stop at 1500 Won... 국민연금 and Foreign Exchange Authorities Releasing Dollars [Why&Next]

Exchange Rate Nearing 1500 Won, National Pension Fund's Currency Hedge Volume Expected to Enter Market Soon
Government's Management Intent Reduces Exchange Rate Volatility
Dollar Strengthens Sharply Due to Trump Tariff Concerns, Volatility Expansion Risks Remain

The upward trend of the won-dollar exchange rate, which had surged to 1,486 won at the end of last year, has somewhat eased. This is because the depreciation of the won has moderated following news that the National Pension Service's (NPS) hedging volume, amounting to 71 trillion won, will be released into the market. However, some assessments suggest that it is still too early to expect exchange rate stability, as the dollar continues its ultra-strong trend globally amid concerns over the tariff policies of the second Trump administration.

Exchange Rate Stabilizes Slightly Amid News of National Pension Service Hedging

On the 3rd, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,469.5 won, up 2.9 won from the previous trading day, and as of 9:45 a.m., it was trading at 1,465.2 won. On the previous day, the first trading day of the new year, the won-dollar exchange rate closed at 1,466.6 won, down 5.9 won from the previous trading day on a weekly trading basis, marking the first decline in about a week.

On January 2, the first trading day of the New Year 2025, the KOSPI index and others were displayed on the status board at the Korea Exchange in Yeouido, Seoul. On that day, the KOSPI index closed at 2,398.94, down 0.55 points (0.02%) from the previous trading day, and the won/dollar exchange rate closed at 1,466.6 won, down 5.9 won from the previous trading day. Photo by Hyunmin Kim

The won-dollar exchange rate had surged to as high as 1,486.7 won intraday on the 27th of last month, marking the highest level since the 2009 global financial crisis. This was due to severe political turmoil prompting domestic and foreign investors to sell won. The exchange rate, which had continued to strengthen, reversed and declined the previous day following news that the NPS's hedging volume would be released into the foreign exchange market.

The NPS hedging means that if the won-dollar exchange rate exceeds a certain threshold, it sells some of its overseas assets through forward foreign exchange contracts. When the NPS sells dollar forward contracts for hedging, banks that buy these contracts sell spot dollars, supplying dollars to the market and causing the won-dollar exchange rate to fall. If the NPS sells part of its overseas assets at the current rate in the 1,460 won range and the rate later drops to 1,300 won, it can even realize a profit.

The NPS Fund Management Committee extended the period for increasing the overseas investment hedging ratio by up to 10% until this year. The NPS's overseas investment assets amount to about 485.5 billion dollars, and 10% of this is 48.5 billion dollars, which converts to approximately 71 trillion won.

Yoon Kyung-soo, Director of the International Department at the Bank of Korea, stated, "It is expected that hedging volume from the NPS will soon be released according to internal decisions," adding, "This will contribute to exchange rate stability." As one of the key officials responsible for foreign exchange authorities, the Bank of Korea's International Department head made a verbal intervention to actively manage foreign exchange market volatility. Lee Soo-hyung, a member of the Bank of Korea's Monetary Policy Committee, also emphasized market management intentions in an interview with a U.S. broadcaster the previous day, saying, "We have policy tools to respond if foreign exchange market volatility expands rapidly," and "Once uncertainty is resolved, the exchange rate will calm down."

Min Kyung-won, an economist at Woori Bank, analyzed, "The Bank of Korea's announcement yesterday about the tactical hedging appearance by the NPS quickly raised market alert levels regarding that volume," and added, "The selling volume from domestic exporters waiting around the mid-1,470 won range also acts as a factor suppressing exchange rate rises."

Concerns Over Trump’s Second-Term Tariff Policies May Increase Volatility Again

Although foreign exchange authorities and the NPS have actively worked to curb market volatility, the possibility of the exchange rate surging again remains. The biggest variable is the ultra-strong dollar driven by U.S. tariff policies. The Dollar Index (DXY), which reflects the dollar's value against six major currencies, currently stands at 109.39, the highest level since November 2022. President-elect Trump’s announcement of large-scale tariffs on major trading partners such as Mexico, China, and Canada has influenced the dollar’s strength.

A recent report by the Bank of Korea’s foreign exchange operations department forecasted, "The dollar will strengthen this year due to inflation reignition concerns stemming from the Trump administration’s implementation of major policies such as tariffs, immigration, and tax cuts," and added, "The relatively robust U.S. economy compared to other countries, combined with economic sluggishness in China and Europe, will also be factors driving dollar strength."

Concerns over export sluggishness also contribute to won depreciation. The government’s '2025 Economic Policy Direction' announced the previous day projected that South Korea’s real GDP growth this year will be only 1.8% compared to the previous year, indicating low growth below the potential growth rate of 2%. This is lower than the Bank of Korea’s (1.9%) and Korea Development Institute’s (KDI, 2.0%) forecasts. The report expressed concerns about the entrenchment of low growth due to intensified competition in export-driven sectors such as semiconductors and changes in U.S. trade policies.

Lee Min-hyuk, an economist at KB Kookmin Bank, explained, "Exports have peaked and are declining, compounded by negative factors such as the Trump administration’s protectionism," adding, "In South Korea’s export-dependent economic structure, export slowdown leads to growth deceleration, which implies that the won’s value may weaken."