South Korea Readies FX Measures as Won Nears 1,500 Threshold

South Korea Is Considering Stepping Up Efforts to Defend the Won Amid Concerns Over Its Recent Slide Against the U.S. Dollar

A senior official from the Bank of Korea has said the country's foreign exchange authorities cannot afford to remain passive as the currency weakens. Kim Jong-hwa, a key voting member of the central bank's monetary policy board, emphasized the potential risks to inflation and purchasing power.

The won has fallen by about 5% against the dollar this quarter, reaching levels not seen in 16 years. Officials have expressed concern that a weaker currency could strain small and medium-sized exporters and fuel inflationary pressures. These worries are compounded by the end of South Korea's policy-easing cycle and the possibility that U.S. interest rate cuts may fall short of expectations, maintaining a wide interest rate differential.

Market participants are now watching for potential intervention by the Bank of Korea and its partners. The won has been trading near 1,465 per dollar, with analysts suggesting that support measures could intensify as the currency approaches a key psychological level of 1,500 per dollar. The National Pension Service, a major player in the foreign exchange market, has already signaled its intention to sell dollars to stabilize the won.

Rising Pressure on the Won

The won's decline has been driven by domestic investors increasing their overseas equity holdings and a lack of aggressive policy easing from the Bank of Korea. With U.S. interest rates still relatively high compared to South Korea's, capital outflows have persisted. The central bank has left interest rates unchanged, maintaining a differential of two percentage points with the U.S., the highest since 1999.

Kim Jong-hwa's remarks reflect a growing consensus among policymakers that inaction could lead to broader economic instability. Small and medium-sized firms, which lack strong currency hedging capabilities, are particularly vulnerable to rising FX rates. These businesses may struggle to absorb higher input costs or pass them on to consumers, risking reduced profit margins and potential defaults.

New Framework for FX Stability

To address the challenges, the Bank of Korea, along with the finance and welfare ministries and the National Pension Service, has initiated a new framework to balance investment returns and currency stability. The NPS is also exploring ways to raise dollars, including issuing bonds in offshore markets. These efforts aim to create a more flexible and responsive foreign exchange strategy.

The NPS has already taken tactical steps, such as selling dollar forwards under its hedging program. Analysts suggest that the fund could become more active in the 1,480 to 1,500 won range, where market pressure is expected to intensify. These actions could serve both as a signal to investors and as a concrete measure to stabilize the currency.

Analysts Watch for Policy Interventions

Market participants and analysts are closely monitoring the government's approach to managing the won's value. With thin liquidity and the approaching end of the year, expectations are growing that the authorities will take further steps to manage foreign exchange volatility. The NPS's recent hedging activity has already had a signaling effect, according to experts.

Economists suggest that the government could deploy a range of tools, including foreign exchange interventions, adjustments to monetary policy, or even fiscal measures, to counteract the won's decline. The key will be maintaining a balance between supporting the currency and not undermining broader economic goals. These measures could also influence investor sentiment and capital flows in the coming months.

Risks to the Outlook

Despite these efforts, the path forward is not without risks. A prolonged weak won could lead to higher inflation and reduce consumer purchasing power, particularly for imported goods. This could undermine South Korea's broader economic recovery and create pressure on policymakers to respond with more aggressive measures.

Additionally, the global economic environment remains uncertain, with geopolitical tensions and shifting monetary policies in major economies like the U.S. and China affecting capital flows. A failure to stabilize the won could lead to further outflows and a deepening of the currency's decline. The government's ability to manage these dynamics will be a critical test of its policy effectiveness in the coming months.

What This Means for Investors

For investors, the situation in South Korea highlights the importance of understanding foreign exchange risks and policy responses. The won's volatility and potential interventions by the Bank of Korea and the NPS may influence asset allocations and hedging strategies. Investors with exposure to South Korean assets or those considering entry into the market should monitor policy developments closely.

The country's semiconductor industry, another key area of economic focus, is also under scrutiny. Plans to build a $3.06 billion foundry to support local chip production reflect broader efforts to strengthen the economy and compete globally. These developments could have long-term implications for South Korea's economic resilience and technological competitiveness.