Bank of Korea Governor Rhee Chang-yong stated that the Korean won has depreciated far beyond a reasonable level, expressing concerns over its potential impact on inflation. Speaking at a Goldman Sachs global macro conference, he explained the recent weakness of the won and urged the National Pension Service to increase its FX hedging ratio.
Bank of Korea (BOK) Governor Rhee Chang-yong expressed deep perplexity over the recent sharp depreciation of the Korean won during a Goldman Sachs global macro conference in Hong Kong on January 29. "If I look back over the past two months since November, I was really puzzled as to why the Korean won started to depreciate much more than I thought reasonable. Compared with the dollar index, we started to decouple in October and November," he said.
The won had hovered around the psychologically important 1,450 won per dollar level for months before sliding to as low as 1,480 won late last month, pressured by the broad strength of the dollar, geopolitical risks, and heavy overseas securities investments by local investors. In response to the heightened volatility, authorities issued strong verbal warnings and implemented various policy measures, helping the currency recover to above the 1,430 won level.
Rhee attributed the sharp fall to a "scarcity in plenty" phenomenon, noting that market participants were reluctant to sell dollars in the spot market despite strong dollar inflows from robust exports. He pointed out that the National Pension Service's (NPS) overseas investments have grown too large relative to the size of the country's foreign exchange (FX) market, reinforcing expectations of further won depreciation and encouraging more overseas investments by individual investors.
"The NPS' current FX hedging target is zero percent, and in my personal view as an economist, that does not make sense. The hedging ratio needs to be raised," he emphasized. The governor welcomed the NPS's recent decision to halve its overseas investment plan this year, which would reduce dollar demand by at least US$20 billion, and said discussions would continue with the government and the pension fund to establish a new framework through system reforms.
If the exchange rate remains in the 1,470-1,480 won range for a prolonged period, the BOK's inflation forecast may need to be revised upward, though inflation is expected to stay around 2 percent this year. On the economic outlook, Rhee highlighted exports of semiconductors, defense products, automobiles, and ships as key growth drivers, with strong momentum in chip and artificial intelligence (AI)-related exports.
