South Korea's NPS Steps Up Dollar Sales to Prop Up Slumping Won

South Korea's National Pension Service has taken a significant step to stabilize the won, activating a foreign-exchange swap agreement with the Bank of Korea according to Bloomberg. The move, confirmed by a person familiar with the matter, marks the beginning of currency-hedging operations aimed at curbing the currency's recent weakness. The NPS, the largest institutional investor in the country, manages nearly $542 billion in foreign assets, giving it substantial influence over the currency's movements as reported by Bloomberg.

The NPS has also begun selling U.S. dollars to support the won, following pressure from policymakers concerned about the currency's impact on inflation and social inequality. Recent outflows from domestic equity markets and rising overseas investments have driven the won to near 16-year lows, prompting coordinated action from financial authorities. The central bank has joined the NPS in a one-year extension of their $65 billion swap agreement, a measure intended to ease pressure on the spot foreign exchange market.

In a press briefing, Bank of Korea Governor Rhee Chang-yong described the current exchange rate as a "crisis" in terms of its macroeconomic consequences. The weak won has contributed to rising inflation, already reaching 2.4 percent in November, and risks deepening economic polarization. Authorities have emphasized the need for the NPS to consider the broader economic implications of its overseas investments, calling for a more flexible and less transparent approach to hedging.

Why the Standoff Happened

The won has depreciated nearly 8% in the second half of 2025, reaching levels not seen since 2009. The decline has been driven by increased overseas equity investments by local investors and profit-taking by foreign investors following strong returns in the Korean stock market according to Yonhap News. The NPS, with its vast global portfolio, has become a key player in the country's efforts to stem the currency's decline. The fund has expanded its hedging capacity by extending the swap agreement with the central bank, a mechanism that allows it to access U.S. dollars without directly impacting the spot market.

The swap facility was first introduced in 2022 to counter the effects of aggressive U.S. interest rate hikes. Since then, the size of the agreement has grown from $10 billion to $65 billion, reflecting the government's growing reliance on the NPS as a structural tool for FX stability. The agreement was extended through the end of 2026 in a joint decision by the Ministry of Economy and Finance and the Bank of Korea.

How Markets Reacted

The announcement of the swap extension had an immediate effect on the won, which rose 0.71% against the dollar to 1,466.5 per dollar. However, the currency has continued to face headwinds, recently trading near 1,472 per dollar, close to its weakest level in over a decade. Market analysts believe the NPS' hedging measures will need to be more dynamic to effectively counter ongoing capital outflows.

Economists have highlighted the significance of the NPS' large-scale transactions. Because the fund operates in such a sizeable volume, its actions can influence the supply and demand of foreign currency in the onshore market. The new flexible hedging approach allows the NPS to adjust its strategies based on evolving market conditions, potentially improving its ability to support the won during periods of volatility.

What Analysts Are Watching

Experts are closely monitoring whether the NPS will increase its hedging ratio beyond the current 10% cap for strategic FX operations. A more aggressive hedging stance could provide greater support for the won, though it would also increase the fund's hedging costs according to Yonhap News. Citigroup economists have suggested that hedging interventions may trigger dollar sales at levels between 1,470 to 1,475 won, a critical range for market confidence.

The government has also established a four-party consultation body involving the finance ministry, Bank of Korea, NPS, and the Ministry of Health and Welfare to coordinate FX policy. The group aims to develop a new framework that aligns the NPS' investment goals with broader financial stability objectives. Bank of Korea Governor Rhee emphasized the need for the NPS to manage its investments with greater macroeconomic awareness, suggesting less transparency around hedging timing could help reduce market volatility.