Seoul: Finance Minister Koo Yun-cheol announced on Wednesday that the government is prepared to take "decisive action" should the foreign exchange (FX) market experience excessive volatility, as the Korean won continues to weaken against the U.S. dollar. "The won tends to react more sensitively compared with other currencies," the minister told reporters, emphasizing the government's commitment to monitoring speculative trading and one-sided market movements.
According to Yonhap News Agency, the rapid decline of the won has led to the formation of a joint consultation body comprising the Ministry of Economy and Finance, the Bank of Korea, the National Pension Service (NPS), and the Ministry of Health and Welfare. This group held its inaugural meeting on Monday to explore strategies for balancing the NPS' investment returns with FX market stability. The minister clarified that discussions on this "new framework" are not temporary measures aimed at counteracting the won's depreciation, but are intended to develop fundamental solutions for stable pension payouts without compromising NPS' profitability.
The NPS, recognized as the world's third-largest pension fund, has been expanding its overseas portfolio, a factor that market participants believe is pressuring the local currency. "As the NPS expands its overseas investments, its impact on the FX market inevitably increases," Koo noted. The minister pointed out that the fund's size now exceeds 50 percent of the country's real GDP, a crucial indicator of economic growth.
Koo stressed the importance of considering potential negative effects on the domestic economy and public welfare, such as inflation or reduced purchasing power, which could result from concentrated overseas investment. Some analysts suggest that the discussions may involve encouraging the NPS to adopt more active currency-hedging strategies, like selling part of its dollar-denominated overseas assets if the won weakens excessively.
In response to inquiries about concerns from the U.S. Department of the Treasury, Koo stated that U.S. authorities also desire stability in the domestic FX market. The Treasury Department had kept Seoul on its list of countries to be monitored for foreign exchange policies in its latest report, citing the growing foreign assets of the NPS and its US$65 billion swap line with the Bank of Korea. While South Korea is not designated as a currency manipulator, it has remained on the monitoring list since November 2024.
Koo also addressed potential measures to provide incentives for exporters to convert their U.S. dollar holdings into Korean won, noting that such measures can be reviewed if necessary. Despite the recent volatility, the domestic currency strengthened against the U.S. dollar for the second consecutive session on Wednesday.