KRW up: South Korea NPS activates strategic FX hedging to curb won weakness and volatility

Summary

• Bank of Korea says NPS has activated strategic FX hedging

• The move aims to manage FX risk and curb won volatility

• Hedging could generate dollar selling and support the won

• Authorities frame it as risk management, not intervention

• Signals lower tolerance for prolonged currency weakness

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South Korea’s central bank, the Bank of Korea, said the country’s National Pension Service (NPS) has activated a new framework for strategic foreign-exchange hedging, marking an important shift in how authorities are seeking to stabilise the won amid persistent currency volatility.

The NPS, one of the world’s largest pension funds with extensive overseas investments, has traditionally run a relatively low level of currency hedging, allowing foreign-exchange moves to flow through to returns. Under the new approach, the fund can activate FX hedging in a more systematic and strategic manner, particularly during periods of heightened market stress or excessive exchange-rate swings.

The move comes as the won has faced sustained depreciation pressure, driven by a strong U.S. dollar, global risk aversion and concerns over capital outflows. A weaker currency raises imported inflation risks and complicates monetary policy, increasing the sensitivity of authorities to sharp or disorderly FX moves. By activating strategic hedging, the NPS effectively becomes a source of dollar selling and won demand, helping to counter downward pressure on the currency.

Crucially, the mechanism is designed to operate as a risk-management tool rather than a form of direct FX intervention. Hedging decisions are intended to be rules-based and aligned with portfolio management objectives, rather than day-to-day market targeting. Even so, given the sheer scale of the NPS’s overseas assets, its hedging activity has the potential to influence FX market dynamics in a meaningful way.

The Bank of Korea has framed the initiative as part of a broader effort to strengthen financial stability without relying solely on interest-rate policy or overt market intervention. It also allows authorities to lean on domestic institutional flows to smooth volatility, while preserving foreign-exchange reserves and avoiding the political sensitivities associated with direct intervention.

For markets, the activation of strategic hedging adds an important new layer to the won’s policy backdrop. While it does not imply a specific exchange-rate target, it signals a lower tolerance for persistent weakness and outsized volatility. It may also act as a deterrent to speculative positioning against the won, particularly during periods of global stress.

Overall, the move underscores South Korea’s increasingly pragmatic approach to FX management, blending monetary policy, institutional balance-sheet tools and communication to contain volatility while maintaining policy flexibility.