SEOUL, December 16 (AJP) -South Korea’s foreign exchange authorities have agreed to extend a $65 billion currency swap arrangement with the National Pension Service (NPS) through the end of 2026, as policymakers step up efforts to stabilize the won amid rising overseas investment flows and renewed market volatility.
The Ministry of Economy and Finance and the Bank of Korea (BOK) in a joint statement on Monday said that the extension will help "absorb the pension fund’s demand for U.S. dollars during periods of market stress," easing pressure on the spot foreign exchange market.
The arrangement with the central bank, which had been due to expire at the end of this year, allows the NPS to obtain dollars via swap transactions rather than buying them directly in the open market when rebalancing or expanding its overseas portfolio.
Although foreign exchange reserves will temporarily decline by the size of the swap during the contract period, authorities stressed that the funds will be fully restored at maturity, making the impact on reserves transitory.
Authorities added that hedging foreign assets through swap transactions would help the NPS mitigate exchange-rate volatility risks associated with its overseas investments, while also supporting the pension fund’s long-term returns.
The NPS swap facility was first introduced in September 2022 with a $10 billion ceiling, at a time when the won was under heavy pressure amid aggressive U.S. rate hikes. Since then, the limit has been expanded steadily as overseas investment by Korea’s largest institutional investor has grown.
The cap was raised to $35 billion in April 2023, $50 billion in June 2024, and further to $65 billion in December 2024, underscoring the authorities’ increasing reliance on the mechanism as a structural FX stabilizer rather than a temporary crisis tool.
Policymakers have said the won’s recent weakness has been driven largely by increased U.S. equity investments by domestic investors and the NPS, alongside profit-taking by foreign investors following strong gains in the Korean stock market.
The won has neared 1,500 won in recent weeks, prompting authorities to deploy a range of measures to safeguard financial stability. The currency reacted immediately to news of the extension. The dollar fell 7 won to 1,470.50 won late Monday, though officials cautioned that FX risks remain elevated given global monetary uncertainty and persistent capital outflows.
Last month, the finance ministry, the BOK, the NPS and the Ministry of Health and Welfare, which oversees the pension fund, established a four-way consultation body to coordinate responses to foreign exchange market developments.
The extension signals that Seoul is prepared to use institutional coordination rather than direct market intervention as its first line of defense against currency instability, as capital flows continue to test the resilience of Korea’s open financial system.
NPS, the world's third largest institutional player, manages 1,100 trillion won ($750 billion), with more than 40 percent invested overseas, spanning U.S. equities, global bonds, private equity and infrastructure. These allocations require large and recurring purchases of foreign currency—primarily U.S. dollars—particularly during periods of portfolio rebalancing or strong global equity inflows.
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