The won-dollar exchange rate fell to 1,334.7 won intraday in the Seoul foreign exchange market on the 7th, marking the lowest level of the year. Dollar sell orders poured in from the opening bell, driving the rate lower. "Companies that had been delaying converting export proceeds received in dollars into won appear to have started selling in earnest," a foreign exchange market official said.
The rate has been falling steeply in recent weeks. Compared with the intraday high of 1,561.5 won on June 5, it has dropped more than 220 won in just over two months. It is the lowest level since October 4, 2024, when the rate stood at 1,331.3 won. As the rate plunged into the 1,330-won range, reports that the National Pension Service (NPS) had suspended strategic currency hedging and begun buying dollars back reinforced perceptions of a floor for the currency.
Yen strength has also contributed to the decline. As expectations grew for a Bank of Japan rate increase, the yen-dollar rate fell into the 155-yen range. Yen strength has fed into won strength, adding downward pressure on the won-dollar rate. Dollar supply from robust semiconductor exports and dollar selling by exporters have compounded the trend, accelerating the won's appreciation.
Expectations of further declines have themselves prompted additional dollar selling. After the rate broke below 1,400 won, the 1,390-won and 1,380-won levels fell in succession, concentrating dollar selling on one side of the market and producing what traders describe as domino selling, in which each leg down triggers more selling.
Foreign exchange authorities acknowledged the possibility of NPS dollar purchases. "Given that the rate came down significantly to the 1,334-won range today, the pension fund may have made some purchases," a senior official at the foreign exchange authorities said. "I understand there has been talk in the market that the fund's buying flows were detected." The official did not confirm specific purchases or hedging operations, but market participants view the remarks as having raised expectations that the NPS would absorb dollars in the 1,330-won range, limiting further dollar dumping.
The pension fund's stance is the opposite of what it was only months ago. When the rate surged into the 1,500-won range, it expanded hedging and sold dollars in response to won weakness. Now it has halted further expansion of hedging, and the possibility of some dollar buying is being discussed. In fact, expectations had already emerged in the market that the NPS would not raise its strategic hedge ratio further once the won-dollar rate fell below 1,390 won. Citi said the fund could stop raising its hedge ratio if the rate stabilizes below 1,390 won, and that existing hedges could be gradually reduced as currency swaps reach maturity.
The NPS hedge adjustment can help ease this one-way bet on won strength. The fund held about 770 trillion won in overseas equity and bond assets as of the end of June, and applying the 15% ceiling on its strategic hedge ratio would theoretically allow hedging of up to about 115 trillion won. Lowering the hedge ratio, however, does not generate 115 trillion won in new dollar purchases; the key effect is a reduction in existing dollar sales. Hedges are typically run on six-month or 12-month maturities, making gradual adjustment the likely outcome.
Wi Jae-hyun, an economist at Kyobo Securities, said recent won strength goes beyond simple dollar weakness. "The won is showing pronounced strength even among Asian currencies," the economist said. "Yen strength and domestic supply and demand have worked together."
Still, analysts say the NPS alone cannot reverse the trend of won strength. Dollar demand in the market is substantial, with foreign investors' net selling of domestic stocks and exporters' trade surplus reaching about 170 trillion won and 200 trillion won respectively in the first half, and robust semiconductor exports continuing. The NPS is closer to a brake slowing the pace of won appreciation than a card that reverses the direction of the exchange rate.
Lee Min-hyuk, a researcher at KB Kookmin Bank, said NPS buying is a factor that eases the recent downward concentration rather than one that lifts the ceiling on the exchange rate. "Dollar supply from the current account surplus is dominant, so the exchange rate is on a downward path over the medium to long term," the researcher said.
