The Bank of Korea anticipates that the won-dollar exchange rate will stabilize if the National Pension Service (NPS) fully engages in currency hedging (risk diversification). The easing of political uncertainties, such as the appointment of Constitutional Court justices, is also expected to exert downward pressure on the exchange rate.
Yun Kyung-su, Director General of the International Department at the Bank of Korea, noted on the 2nd to Yonhap News Agency, "It is expected that the NPS will soon release currency hedging amounts based on its internal decisions," adding, "this will contribute to stabilizing the exchange rate."
When the NPS hedges currency, it means that if the won-dollar exchange rate is higher than a certain level set by its own judgment, it will sell some overseas assets through forward exchange contracts. In this process, if the won-dollar exchange rate drops, the NPS can gain a profit and lower the exchange rate by selling dollars.
Based on the foreign exchange swap contract signed with the foreign exchange authorities, the process where the foreign exchange authorities directly supply the dollars needed for overseas asset purchases to the NPS is also expected to begin in earnest soon. This could reduce dollar demand, increasing the downward pressure on the exchange rate.
Political movements are also expected to aid in stabilizing the exchange rate. Director General Yun explained, "At the end of last month, the leaders of the ruling and opposition parties met and agreed to activate a trilateral government policy consultation body, and two Constitutional Court justices were appointed," adding, "from an overseas perspective, it seems that the previously heightened uncertainties and tensions in Korean politics have been eased."