Won Stabilizes on Direct Intervention, National Pension Hedging Mechanism Explained
Over the weekend, the won-dollar rate surged past 1,560, raising fears it could breach 1,600, but the tide turned after the so-called F4 — the Ministry of Economy and Finance, Bank of Korea, and Financial Supervisory Service — convened an emergency currency meeting and issued verbal intervention. The won subsequently fell to 1,518, down about 9 won from the prior regular session close, as verbal intervention took effect. Similar messaging followed in a presidential press conference, reinforcing the intervention stance.
What proved decisive was that verbal intervention was quickly followed by actual direct intervention. News that the National Pension Service had begun currency hedging drove the won down 24 won in a single day, with further declines the following day bringing it to around 1,510. Historically, National Pension Service analysis had found that not hedging currency risk produced better returns than hedging, but as criticism grew that the fund was simply buying dollars and taking them out of the market — pushing up the exchange rate with no offsetting flow — the fund had strategically revised its rules to allow hedging up to 15% of overseas assets.
When the National Pension Service enters into a forward contract with a bank, the bank hedges its own currency exposure by borrowing dollars in the market and immediately selling them. This process actually injects dollars into the market, creating downward pressure on the exchange rate — and this time, the fund's execution of hedging under the new rule was the direct trigger for the dollar supply that drove the won's decline.
Panelists credited the swiftness of the response — verbal intervention followed almost immediately by direct intervention — with much of its effectiveness. In the past, verbal intervention alone was often disregarded by the market within days, reverting to prior levels. This time, the rapid escalation to direct intervention caught the market off guard. With Korea's fundamentals — current account and trade balances — solid and dollar reserves sufficient, the response was seen as having calmed excessive anxiety over won weakness.