Government Takes Proactive Stance on FX Market Volatility
South Korea's Finance Minister Koo Yun-cheol has signaled that the government is prepared to take decisive action if the foreign exchange (FX) market experiences excessive volatility. This comes as the Korean won continues to weaken against the U.S. dollar, raising concerns among policymakers and market participants.
"The won tends to react more sensitively compared with other currencies," Koo said during a press briefing. He emphasized that the government is closely monitoring speculative trading and one-sided market movements, indicating that any significant fluctuations could prompt immediate intervention.
The recent 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. The group held its first meeting to explore ways to balance the NPS' investment returns while maintaining stability in the FX market.
This initiative is part of what the minister calls a "new framework" aimed at ensuring long-term stability for pension payouts without compromising the NPS' profitability. The discussions are not intended as a temporary fix but rather as a means to develop fundamental measures that address both financial and economic challenges.
Impact of NPS Investments on the FX Market
The NPS, which is the world's third-largest pension fund, has been expanding its overseas investments, which market participants believe is contributing to pressure on the local currency. As the fund grows, its influence on the FX market becomes more pronounced.
Koo noted that the NPS' size already exceeds 50 percent of the country's real gross domestic product (GDP), making it a significant player in the economy. He warned that concentrated overseas investments could lead to inflation or reduced purchasing power, ultimately affecting real income and public welfare.
Analysts have speculated that the new framework may include encouraging the NPS to adopt more active currency-hedging strategies. For example, selling part of its dollar-denominated overseas assets if the won weakens excessively could help stabilize the FX market.
International Concerns and Monitoring
The U.S. Department of the Treasury has expressed interest in maintaining stability in South Korea's FX market. Although South Korea is not designated as a currency manipulator, it remains on the U.S. monitoring list for foreign exchange policies since November 2024.
In its latest report released in June, the Treasury highlighted the growing foreign assets of the NPS and its $65 billion swap line with the Bank of Korea. These factors were cited as potential tools for currency intervention, though no formal designation has been made.
Koo acknowledged that the U.S. authorities share the goal of maintaining FX market stability. However, he did not elaborate on specific concerns raised by the U.S. side.
Potential Measures for Exporters
When asked about possible measures to encourage exporters to convert their U.S. dollar holdings into Korean won, Koo stated that such initiatives could be reviewed at any time if needed. This suggests that the government is open to exploring additional tools to support the domestic currency.
Despite the ongoing concerns, the Korean won showed signs of recovery, strengthening against the U.S. dollar for the second consecutive session after hitting its weakest level since April.
As the government continues to monitor the situation, the focus remains on balancing economic stability with the need for long-term financial sustainability. The actions taken by the joint consultation body will play a crucial role in shaping the future of South Korea's FX market and its broader economic landscape.
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