The government said on the 14th it will draw up market-stabilizing measures to slow the recent pace of the won's depreciation. As the rate rose steadily from the 1,350-won range in July and topped 1,470 won on the day, authorities moved to a verbal intervention. If the rate breaks through 1,480 won, it would return to the level seen when the 12·3 martial law at the end of last year or the U.S.-China trade conflict intensified in April, causing a sharp drop in the won's value.
Foreign exchange market experts say the rise in the rate is the result of a combination of factors that are hard to resolve in the short term, including the expansion of overseas stock investments by domestic investors, the global strength of the U.S. dollar, and a synchronized move with the weak yen. In response, there is speculation the government could mobilize the National Pension Service to supply dollars to slow the pace of the rate's rise.
Koo Yun-cheol, Deputy Prime Minister and Minister of the Ministry of Economy and Finance, Rhee Chang-yong, Bank of Korea governor, Lee Eog-weon, Financial Services Commission chair, and Lee Chan-jin, Financial Supervisory Service governor, said in a message sent to the press corps at 9:15 a.m. that "under the perception that expectations for a weaker won could become entrenched, we will respond by actively using available tools." They added, "We plan to draw up measures to stabilize the rate through close discussions with major supply-and-demand players such as the National Pension Service and exporters."
Initially, the message from Deputy Prime Minister Koo and others was to be released at 9:50 a.m. But as the rate opened at 1,471.9 won, up 4.2 won from the previous day, and continued to rise, the release time was moved up by 35 minutes. Immediately after the message from Deputy Prime Minister Koo and others was released, the rate turned lower, dropping by more than 10 won. As of 1:14 p.m., it was at 1,457.5 won, down 13.5 won from the previous transaction.
Foreign exchange market experts see the authorities' verbal intervention as driven by the rising likelihood that the rate will break through 1,480 won, which is called a "psychological resistance level" among corporations and investors. Im Hwan-yeol, a Woori Bank researcher, said, "If the rate exceeds 1,480 won, it could break through 1,500 won (as the pace of selling won accelerates)," adding, "Because a rate in the 1,500-won range has appeared only twice—during the foreign exchange crisis and the global financial crisis—it would be difficult to stabilize market sentiment if it materializes."
There is speculation that to prevent further gains, the government could ask the National Pension Service to hedge foreign exchange on its overseas investment assets. FX hedging is an investment technique used to reduce the risk of losses from fluctuations in the value of foreign currencies such as the dollar. For example, when investing in overseas stocks at 1,400 won per $1, one can sign a contract in advance to receive 1,400 won per $1 when selling the stocks later.
If requested by the government, the National Pension Service can hedge up to 15% of its foreign currency assets. If the rate rises more than it internally anticipated, it can sell part of its overseas assets through forward contracts (transactions to buy or sell at a pre-agreed rate on a specific date). This has the effect of supplying dollars to the market. As of the end of August, the National Pension Service's foreign currency assets totaled 771.3 trillion won.
Experts also say expanding the foreign exchange swap (exchange) limit between the Bank of Korea and the National Pension Service could slow the pace of the rate's rise. The National Pension Service needs to buy dollars in the market for overseas investments, but if it trades directly with the Bank of Korea, which holds foreign exchange reserves, dollar demand in the FX market will decline. The Bank of Korea and the National Pension Service currently have a foreign exchange swap contract with a $65 billion limit. The contract runs through the end of this year.