Hong kong: Bank of Korea (BOK) Gov. Rhee Chang-yong has said the Korean won depreciated far beyond a reasonable level, expressing concerns about its potential impact on inflation. "If I look back over the past two months since November, I was really puzzled as to why the Korean won started to depreciate much more than I thought reasonable. Compared with the dollar index, we started to decouple in October and November," Rhee said during a global macro conference organized by Goldman Sachs in Hong Kong on Wednesday.

According to Yonhap News Agency, the won had hovered around the psychologically important 1,450 won level per dollar for months and slid as low as the 1,480 won level late last month, pressured by the broad strength of the dollar, geopolitical risks, and heavy overseas securities investments by local investors. In response to the heightened volatility, authorities issued strong verbal warnings and implemented various policy measures, helping the currency recover to above the 1,430 won level.

Rhee attributed the sharp fall of the won to what he described as a "scarcity in plenty" phenomenon, noting that market participants were reluctant to sell dollars in the spot market despite strong dollar inflows driven by robust exports. He pointed out that the scale of the National Pension Service's (NPS) overseas investments has grown large relative to the size of the country's foreign exchange (FX) market, suggesting that it has effectively reinforced expectations of a further depreciation of the won to encourage additional overseas investment by individual investors.

"The NPS' current FX hedging target is zero percent, and in my personal view as an economist, that does not make sense. The hedging ratio needs to be raised," Rhee said. The governor welcomed the NPS' recent decision to cut its overseas investment plan by half this year, noting it would reduce the dollar demand by at least US$20 billion, and said discussions would continue with the government and the pension fund to establish a new framework through reforms to the current system.

Rhee warned that if the exchange rate remains in the 1,470-1,480 won range for a prolonged period, the BOK's inflation forecast may need to be revised upward, though noting that inflation is expected to be kept around 2 percent this year. On the economic outlook, Rhee said South Korea's key growth drivers this year will be exports of semiconductors, defense products, automobiles, and ships, highlighting strong momentum in chip and artificial intelligence (AI)-related exports.