Foreign Exchange Reserves Decline Again as US Early Interest Rate Cut Expectations Are Blocked

Turned Down After 3 Months

Expectations for an early interest rate cut in the United States were blocked, leading to a decline in foreign exchange reserves last month for the first time in three months.

According to the "Foreign Exchange Reserves at the End of January 2024" released by the Bank of Korea on the 5th, foreign exchange reserves in January amounted to $415.76 billion, a decrease of $4.39 billion from the previous month.

Foreign exchange reserves had shown a decline for three consecutive months from August to October last year, but rebounded in November as expectations grew that the U.S. Federal Reserve might cut interest rates sooner. The reserves continued to rise for two months but decreased again in January.

The Bank of Korea explained the decrease in foreign exchange reserves as "the U.S. dollar conversion amount of other currency foreign currency assets, a decrease in foreign currency deposits of financial institutions, and a temporary decrease due to currency swaps with the National Pension Service."

In fact, last month, U.S. Federal Reserve officials repeatedly warned against early rate cuts, and economic indicators remained robust, causing the U.S. dollar index to rise by 2.1%. Meanwhile, exchange rates of major currencies against the U.S. dollar all declined: the euro (-2.0%), the pound (-0.3%), the yen (-4.2%), and the Australian dollar (-3.3%).

Additionally, geopolitical risks centered in the Middle East escalated as the U.S. conducted airstrikes against Yemen's Houthi rebels, pushing the won-dollar exchange rate above 1,340 won for the first time in two and a half months, reaching a record high last month.

By category, securities?which include government bonds, corporate bonds, government agency bonds, and asset-backed securities (MBS, covered bonds)?declined the most, dropping by $4.98 billion. Securities accounted for $368.68 billion, or 88.7% of total holdings, while deposits accounted for $22.78 billion, or 5.5%. Special Drawing Rights (SDR), the currency that IMF member countries can withdraw without collateral during balance of payments difficulties, stood at $14.94 billion (3.6%), gold at $4.79 billion (1.2%), and the IMF position, the amount freely withdrawable by IMF members, was $4.56 billion (1.1%).

Meanwhile, as of the end of December last year, South Korea ranked 9th globally in terms of foreign exchange reserves, unchanged from the previous month. China ranked first with $3.238 trillion, Japan second with $1.2946 trillion, and Switzerland third with $864.2 billion.