S Korea pension fund initiates new round of strategic FX hedging to support won

[SEOUL] South Korea’s national pension fund has initiated a new round of strategic foreign exchange hedging operations on Wednesday (Dec 24), two sources familiar with the matter told Reuters, sending the won to its highest level against the dollar in about a month.

The National Pension Service (NPS), the world’s third-largest pension fund with US$926.81 billion in assets, is a major player in domestic markets.

“Strategic hedging has been initiated,” said one of the sources, who declined to be identified due to the sensitivity of the matter.

Another source said: “It is a newly initiated strategic hedging. Strategic hedging, once started, is carried out for a set period, and it is expected to be for a significant period of time.”

The won sharply reversed course on the news to rally as much as 1.6 per cent to 1,458.0 per dollar, the highest since Nov 26, after opening the session at 1484.9, the weakest since Apr 9.

“Strategic hedging, given its huge size, could cap the upside of the dollar-won exchange rates,” one local currency trader said.

The NPS declined to comment on its investment strategies citing the impact on markets.

The pension fund’s move came after the welfare ministry said a day earlier it would conduct hedging operations more flexibly. The ministry oversees the pension fund’s investment policies and formed a consultative body with foreign exchange authorities last month to coordinate efforts on the market impact.

Recent weakness in the won currency, still down 7 per cent in the second half of 2025, has raised inflation concerns among policymakers, who view increasing overseas investment by the pension fund, retail investors and companies as a drag on the won.

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Earlier on Wednesday, foreign exchange authorities issued a warning via text message to reporters that excessive weakness in the won was undesirable.

“It will be soon found that a series of meetings were held and policy measures were announced in recent weeks in preparations to demonstrate the government’s strong will and capabilities,” they said.

The finance ministry, in a separate announcement on Wednesday, rolled out tax policies to spur inflows of assets held overseas, after the chief presidential policy adviser said various measures had been planned to support the won.

The ministry is offering tax benefits to retail investors hedging their overseas stock holdings or selling them to invest back home. It also offered tax incentives to companies repatriating earnings from abroad.

“Taken together, the series of measures will be able to roll back one-sided market expectations for a weak won to some degree,” said Park Sang-hyun, an economist at iM Securities.

Last week, South Korea’s central bank renewed its US$65 billion currency swap programme with the NPS by a year to support the pension fund’s hedging operations.

The Bank of Korea (BOK) also decided to pay interest on financial firms’ reserve deposits to make up for temporary losses stemming from the swap line with the NPS, along with other policy tools introduced recently to cap losses in the won.

“In our estimation, the BOK-NPS swap could temporarily reduce to around US$5 billion per month of US dollar demand from the spot market considering the case in February-April 2025,” Kim Jin-wook, an economist at Citi, said in a report.

Kim forecast the dollar-won rates to stabilise at 1,450 over the next three months, citing strong policy signals from the authorities. REUTERS