Last Month's South Korea Foreign Exchange Reserves at $411 Billion... Lowest in 4 and a Half Years

Disappearance of the Quarter-End Effect and Exchange Rate Defense by Authorities
Psychological Threshold of $400 Billion Maintained

South Korea's foreign exchange reserves turned to a decline after a month, falling to the $411 billion level. This is the lowest level since June 2020 ($410.7 billion). The 'quarter-end effect' disappeared last month, and the foreign exchange authorities continued to defend the exchange rate as the won-dollar exchange rate fluctuated sharply due to uncertainties in the tariff policies of the new Trump administration.

According to the Bank of Korea on the 5th, South Korea's foreign exchange reserves at the end of last month were $411.01 billion, down $4.59 billion from the end of the previous month ($415.6 billion). The foreign exchange reserves falling to the $411 billion level is the first time in about four and a half years since recording $410.7 billion in June 2020. However, the psychological threshold of $400 billion was maintained.

South Korea's foreign exchange reserves steadily increased until the second half of 2021. The reserves, which recorded $469.2 billion at the end of October 2021, began to decrease in size due to the Federal Reserve's policy rate hikes that started in earnest in 2022.

Last year, the reserves remained between $412.2 billion and $419.9 billion at the end of each month. In October and November last year, they decreased for two consecutive months. As the dollar strengthened amid growing uncertainties in U.S. trade policies, the foreign exchange authorities sold dollars to defend the exchange rate. However, in December last year, when there were many domestic and external variables, the reserves slightly increased. This was due to foreign exchange banks concentrating dollar deposits with the Bank of Korea to meet the Bank for International Settlements (BIS) ratio at the quarter-end.

Last month, seasonal effects appeared again as deposits decreased, and the authorities' measures to ease foreign exchange market volatility to defend against the sharp fluctuations in the exchange rate following Trump's inauguration continued, resulting in a larger decrease in foreign exchange reserves. The expansion of foreign exchange swaps with the National Pension Service was also a factor in the decrease. However, the Bank of Korea explained that the decrease in foreign exchange reserves due to this is temporary because the funds are fully returned upon maturity. A Bank of Korea official said, "With the disappearance of the quarter-end effect, foreign currency deposits of financial institutions decreased, and measures to ease foreign exchange market volatility also affected (the decrease in foreign exchange reserves last month)."

Among the components of foreign exchange reserves, securities including government bonds, corporate bonds, and government agency bonds decreased by $4.65 billion from the end of the previous month to $362.02 billion. This amount accounts for 88.1% of the total foreign exchange reserves. Deposits increased by $70 million to $25.29 billion, accounting for 6.2% of the total. The two major components accounted for a total of $387.31 billion at the end of last month, down $4.58 billion from $391.89 billion at the end of the previous month. In addition, Special Drawing Rights (SDR) at the International Monetary Fund (IMF) were $14.72 billion at the end of last month, accounting for 3.6%, gold was $4.79 billion, accounting for 1.2%, and the IMF position was $4.19 billion, accounting for 1.0%, respectively.

As of the end of December last year, South Korea ranked 9th in the world in terms of foreign exchange reserves, the same as the previous month. China was first with $3.2024 trillion in reserves. Japan was second with $1.2307 trillion, and Switzerland was third with $909.4 billion. India ($635.7 billion), Russia ($609.1 billion), Taiwan ($576.7 billion), Saudi Arabia ($436.6 billion), and Hong Kong ($421.5 billion) followed.