Finance chief pledges 'decisive action' in case of excessive FX market volatility

Finance Minister Koo Yun-cheol speaks to reporters at the Government Complex Sejong, Wednesday. Yonhap

Finance Minister Koo Yun-cheol said Wednesday that the government will take "decisive action" if excessive volatility occurs in the foreign exchange (FX) market, as the Korean won continues to weaken against the U.S. dollar.

"The won tends to react more sensitively compared with other currencies," the minister told reporters.

"We will take decisive action if volatility expands excessively," he added, stressing that FX authorities are also closely monitoring speculative trading and one-sided market movements.

The fast pace of the won's recent decline has prompted the Ministry of Economy and Finance, the Bank of Korea, the National Pension Service (NPS) and the Ministry of Health and Welfare overseeing the pension fund to form a joint consultation body.

The four-way group held its inaugural meeting on Monday to explore ways to balance the NPS' investment returns with stability in the FX market, creating what the minister calls a "new framework."

"Discussions on the new framework are not intended as a temporary measure to mobilize the NPS to counteract the won's depreciation," the minister said.

He added the newly created body aims to develop fundamental measures that ensure stable pension payouts without undermining the NPS' profitability, with further discussions on potential medium- to long-term reforms.

The NPS, the world's third-largest pension fund, has a growing overseas portfolio, which market participants have cited as a factor contributing to pressure on the local currency.

"As the NPS expands its overseas investments, its impact on the FX market inevitably increases," the minister said, noting that the fund's size already exceeds 50 percent of the country's real gross domestic product (GDP), a key gauge of economic growth.

He further said if concentrated overseas investment in the short term leads to inflation or reduced purchasing power, resulting in a decline in real income, the potential negative effects on the domestic economy and public welfare must be considered.

Some analysts have speculated the discussions could include encouraging the NPS to adopt more active currency-hedging strategies, such as selling part of its dollar-denominated overseas assets if the won weakens excessively.

Asked about any possible concerns raised by the U.S. Department of the Treasury, Koo said the U.S. authorities also seem to want stability in the domestic FX market.

The Treasury Department had kept Seoul on its list of countries to be monitored for their foreign exchange policies in its latest report released in June.

The report cited the growing foreign assets of the NPS and its $65 billion swap line with the Bank of Korea and other financial authorities, suggesting it could potentially be viewed as a tool for currency intervention.

Although Korea is not designated as a currency manipulator, it has remained on the monitoring list since November 2024.

Asked about possible measures to provide incentives for exporters to convert their U.S. dollar holdings into Korean won, Koo said such measures can be reviewed at any time if needed.

After hitting its weakest level since April, the domestic currency strengthened against the U.S. dollar for the second consecutive session on Wednesday.