The government said on the 15th it will extend by one year, through the end of next year, the period allowing the National Pension Service to conduct a "10% strategic currency hedge" on overseas investment asset to slow the recent rise in the won-dollar exchange rate. It will also extend by one year, through the end of next year, the term of its $65 billion foreign exchange swap contract with the Bank of Korea.
For now, the foreign exchange authorities decided to deploy every option they can implement by mobilizing the National Pension Service. As of the end of September, the National Pension Service is estimated to have invested about 780 trillion won overseas, amounting to 57% of total asset. As a result, it has become a major player in the foreign exchange market that drives the exchange rate trend.
The Ministry of Health and Welfare said on the afternoon of the 15th that the National Pension Service Fund Management Committee, held at Government Complex Seoul, deliberated and approved the measures. The ministry said, "The committee decided to establish a flexible execution plan so that strategic currency hedging can respond flexibly to market conditions."
Currency hedging is an investment technique used to reduce the risk of loss from fluctuations in the value of foreign currency such as the dollar. For example, if $1 is 1,400 won when investing in overseas stocks, it involves signing in advance a contract to receive 1,400 won per $1 when selling the stocks later. The National Pension Service is, under the name of "tactical currency hedge," at its discretion selling dollars and buying won within 5% of overseas asset.
"Strategic currency hedge" is a method in which, if the exchange rate rises above a pre-set threshold, a certain proportion of dollar-denominated overseas asset held is sold. It can be expected to lower the exchange rate by increasing dollar supply in the market. Earlier, at the end of 2022, the fund committee temporarily raised the strategic currency hedge ratio from 0% to up to 10% for the first time. This measure was originally set to end at the end of this year, but it has now been extended once more.
The National Pension Service also said it decided to extend by one year, through the end of next year, the term of its foreign exchange swap contract with the Bank of Korea (BOK), currently set at $65 billion. Under the swap contract, the National Pension Service receives dollars needed for overseas investments from the Bank of Korea and deposits a corresponding amount of won with the BOK. Because the National Pension Service does not have to buy dollars directly in the foreign exchange market, this too can help slow the pace of the exchange rate's rise. The two institutions first concluded a $10 billion swap transaction in 2022 and have extended the contract annually while increasing the limit.
Still, it is uncertain whether these government measures can reverse the recent upward trend in the exchange rate. On Oct. 24, the government said it would form a "four-party exchange rate consultative body" with the Bank of Korea, the Ministry of Health and Welfare, and the National Pension Service, but the exchange rate continued to rise afterward. On this day as well, it closed at 1,471 won, down 2.7 won. The day before, the Ministry of Economy and Finance (MOEF) and the Bank of Korea said they held an emergency economic ministers' meeting on the exchange rate, but the upward trend did not reverse.