South Korea's foreign exchange reserves have fallen to 13th place globally for the first time in history. This decline is attributed to the government's large-scale dollar sales to defend the exchange rate, coupled with increases in reserves by other countries. As foreign capital continues to exit, the won-dollar exchange rate is approaching 1,560 won, raising concerns that the government's ability to respond may be diminishing.
According to the Bank of Korea, as of the end of May, the country's foreign exchange reserves stood at $427.36 billion, ranking 13th in the world. The reserves dropped from 9th place at the end of last year to 12th by the end of February, and have now fallen another spot in just three months.
The government's interventions in the market to address the ongoing high exchange rates have contributed to the decrease in reserves. In the fourth quarter of last year, authorities sold a net $22.467 billion, marking the largest market stabilization effort on record. This was followed by a net sale of $13.628 billion in the first quarter of this year. Since the fourth quarter of 2024, the authorities have engaged in net selling for six consecutive quarters, totaling $45.352 billion during this period.
These measures to defend the exchange rate have led to a reduction in foreign exchange reserves. The reserves decreased from $428.05 billion at the end of last year to $423.66 billion by the end of the first quarter of this year. However, the reserves are influenced by various factors, including fluctuations in the value of the dollar and returns on foreign assets, not just market interventions.
In particular, following heightened geopolitical tensions in the Middle East at the end of February, the exchange rate surged, prompting the authorities to stabilize the market. Consequently, in March, foreign exchange reserves fell by $3.97 billion, marking the largest decline in 11 months since April of last year.
The increase in foreign exchange reserves of countries with similar rankings to South Korea has also contributed to the decline in its position. Singapore, which was outside the top 10 at the end of last year, has increased its reserves and entered the top 10.
This month, the won-dollar exchange rate is threatening to reach 1,560 won. Analysts suggest that supply and demand pressures, rather than fundamentals, are driving the exchange rate higher. The rise in the domestic stock market has led to increased profit-taking by foreign investors, along with rebalancing by some global funds.
In the first half of this year, foreign investors sold a net 149.464 trillion won in the stock market (KOSPI), the largest amount on record. Based on the average won-dollar exchange rate of 1,484.6 won during the first half, this amounts to approximately $100.4 billion. During the same period, South Korea's cumulative trade surplus reached a record $138.3 billion, but the scale of foreign capital outflows has matched this level, contributing to upward pressure on the exchange rate.
Market analysts also indicate that there are limited policy options available to counter the rising exchange rate. Kyobo Securities estimates that based on the intervention patterns since the Bank of Korea began disclosing actual intervention amounts in 2019, the foreign exchange reserves available for market stabilization in the second half of this year could be around $50 billion.
Additionally, the National Pension Service has not disclosed its currency hedge size since the introduction of the new framework, but estimates suggest it could be around $70 billion based on overseas investment balances as of April and historical hedge ratios (15-20%).
Wi Jae-hyun, a researcher at Kyobo Securities, stated, "While the authorities are using foreign exchange reserves for dollar sales interventions and encouraging currency hedging by the National Pension Service to ease upward pressure on the exchange rate, the available scale is not large. If foreign rebalancing continues in the second half, the ability to respond may become insufficient."
* This article has been translated by AI.
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