SEOUL, Dec 16 Reuters South Korea39;s mammoth state pension fund will hedge foreign exchange risks for up to 10 of its overseas investment compared with zero up to now, the welfare ministry said on Friday, a move expected to ease dollar demand on the onshore FX market.

The fund has grown in size and its increasing purchases of dollars for investment abroad have been blamed for exacerbating the dollarwon39;s already rising trend in recent months. South Korea39;s currency hit its weakest level in 13 years in October.

The finance ministry last month asked the National Pension Service NPS, the agency in charge of the fund, to increase the ratio of FX hedging to ease the fund39;s market impact from dollarbuying activities. The panel that governs the fund39;s investment policies decided to allow it to adjust its ratio of FX hedging to up to 10, for a limited period, the welfare ministry said on Friday.

If foreign exchange rates rise to unusually high levels again, it is necessary to temporarily reduce the size of the foreign exchange exposure until the rates stabilise, the ministry said in a statement after the panel met.

The fund will also be allowed to hold foreign stocks up to 3 percentage points above or below its target ratio in the event of extreme price fluctuations, the ministry added.

The pension fund held 27.6 of total assets in foreign stocks as of endSeptember, compared with a yearend target of 27.8.

The change was significant for the market in the sense…