South Korea Bolsters Currency Defenses Amidst Won’s Slide to 15-Year Low
SEOUL – South Korea’s financial authorities have taken decisive steps to shore up the embattled won, which recently plummeted to its lowest level in 15 years against the US dollar. The Bank of Korea (BOK), the nation’s central bank, and the National Pension Service (NPS), the world’s third-largest pension fund, announced a significant expansion and extension of their existing foreign exchange swap line agreement. This strategic move aims to mitigate the impact of the won’s depreciation and stabilize the volatile foreign exchange market.
The enhanced agreement will see the swap line, initially established in September 2022 at $30 billion and subsequently increased to $50 billion, further expanded to $65 billion. This mechanism allows the NPS to borrow US dollars directly from the BOK’s foreign exchange reserves, effectively reducing the need for the pension fund to purchase dollars in the open market, a practice that often exacerbates downward pressure on the won. Furthermore, the agreement’s duration has been extended by one year, providing stability and support through the end of 2025.
The BOK emphasized the market-stabilizing nature of this arrangement, stating that it "is expected to help stabilize the foreign exchange market by absorbing the pension fund’s demand to buy dollars in the spot market." By providing the NPS with a readily available source of dollars, the central bank aims to curb the fund’s reliance on open market transactions, thereby reducing demand-side pressure on the won and potentially mitigating further declines.
In a parallel move aimed at curbing volatility, the Ministry of Health and Welfare, which oversees the NPS’s investment policies, announced that the fund will maintain its strategic foreign exchange hedging ratio at a maximum of 10% until the end of 2024. This decision reflects the government’s commitment to managing exchange rate risks and minimizing the impact of currency fluctuations on the NPS’s substantial overseas investments.
The confluence of these measures underscores the South Korean government’s proactive approach to managing the challenges posed by the weakening won. The currency’s recent decline is attributed to a complex interplay of factors, including persistent global economic uncertainties, the strengthening US dollar, and concerns surrounding the health of the Chinese economy, a crucial trading partner for South Korea.
These coordinated actions by the BOK and the NPS are expected to inject a measure of stability into the foreign exchange market, potentially mitigating further depreciation of the won. The extended and expanded swap line provides a crucial backstop, allowing the NPS to access dollars without further destabilizing the market. Maintaining a capped hedging ratio further contributes to managing exchange rate risks and preserving the value of the pension fund’s international holdings. The efficacy of these measures will be closely monitored as the South Korean economy navigates the turbulent global landscape. The government’s commitment, however, signals a resolute stance against unchecked currency volatility and underscores its dedication to protecting the nation’s financial stability.
