Bank of Korea Governor Rhee Chang-yong delivers a New Year's address at Hotel Lotte in Seoul, Jan. 3. Yonhap

A further weakening of the Korean currency against the U.S. dollar will be limited, aided by a much-anticipated supply of U.S. dollars secured through the sale of offshore assets held by the National Pension Service (NPS), market watchers said Wednesday.

Many believe that the supply of at least $48.2 billion, or the 10 percent ceiling of the pension fund's foreign currency (FX) hedge allowance, will lead to up to 40 won in gains of the Korean currency against the dollar.

Others say the hedge instrument will no longer have a dramatic effect, as indicated by recently muted depreciation of the Korean won that had already priced in the impending NPS move.

The NPS hedge is whereby the pension fund sells part of its dollar-denominated assets through futures or forward contracts, triggered by a greater-than-expected depreciation of the won. This helps reduce exchange rate volatility risks.

“The NPS hedge will strengthen the Korean currency by about 30 to 40 won,” Jang Jae-chul, chief economist at KB Securities, said.

The standard NPS hedge is limited to 5 percent of its assets held overseas.

However, an additional 10 percent is allowed if the Korean currency stays 1,450 won or weaker for more than five consecutive trading days, he said.

“The won has been weaker than 1,450 won against the dollar since Dec. 19, 2024, for nine consecutive trading sessions, so the necessary conditions are met.”

However, any near-term sharp appreciation is limited due to the extended global reign of the dollar, in his view.

“The market has priced in the NPS move, a reason why the won has not weakened sharply over the past few days. Continued depreciation pressure on the Chinese yuan will likely push the Korean currency to move in sync. The the future trajectory of the won will be determined by tariff and trade policies under the second Trump administration.”

Standard Chartered Bank Korea senior investment strategist Hong Dong-hee said the Korean currency experienced a period of overshooting over the past month, spooked by a broad risk-averse sentiment.

“The weeks of political turmoil led many to abandon the Korean currency,” he said. “Further fueling this move was the Chinese stimulus and the subsequent depreciation of the yuan, pushing it below 7.3 against the dollar.”

The collective pessimism was tempered by the Bank of Korea's (BOK) foreign currency reserves increasing to $415.6 billion at the end of 2024, up $2.1 billion from November, he said.

“Concerns had grown over the figure falling below the psychologically significant $410 billion. However, the increase in reserves surprised market participants positively, limiting a further weakening of the Korean won.”

The NPS owned $482.8 billion worth of assets overseas as of October.

A 10 percent hedge will translate into about $50 billion in dollar supply, equivalent to more than 11 percent of the central bank's foreign currency reserves of $415.6 billion as of the end of 2024.

Meanwhile, BOK's international department head director Yoon Kyoung-soo said Thursday that the FX market will stabilize, supported by the supply of dollars by the NPS.

Also in store was the FX authorities' supply of dollars to the NPS to assist with offshore asset purchase needs, as outlined by an FX swap agreement.

The director said that political developments over the past week will improve financial market conditions, alleviated by the appointment of two Constitutional Court justices to oversee President Yoon Suk Yeol's impeachment trial and the formation of a dialogue platform between the ruling and opposition blocs.

“Global investors are broadly reassured that the country's economic dynamics are fully functioning, independent of the political uncertainties,” he said, mirroring the centralized message of BOK Governor Rhee Chang-yong. Rhee remains adamant that the economy should not veer off course, despite escalating political wrangling.

The Korean currency weakened to 1,474.56 won against the dollar on Thursday but rebounded to 1,444.84 on Tuesday, driven in part by expectations of a potential easing of tariffs under the Trump administration.