Despite Government's Currency Defense, Foreign Exchange Reserves Maintained at 410 Billion Dollars

Foreign Exchange Reserves at $415.6 Billion as of Late December
Despite Dollar Sales by Foreign Exchange Authorities Due to Rapid Exchange Rate Surge, Reserves Increased
Main Cause: Increase in Foreign Currency Deposits at Financial Institutions

An employee is organizing US dollars at the Hana Bank Counterfeit Response Center in Euljiro, Seoul.

Despite the recent sharp rise in the won-dollar exchange rate prompting the foreign exchange authorities to intervene in the market, South Korea's foreign exchange reserves slightly increased in December last year. Although the authorities sold dollars to stabilize the soaring exchange rate, it is believed that the main reason was that banks concentrated their dollar deposits with the Bank of Korea to meet the Bank for International Settlements (BIS) ratio at the end of the quarter.

On the 6th, the Bank of Korea announced that as of the end of December last year, South Korea's foreign exchange reserves stood at $415.6 billion, up $210 million from $415.39 billion at the end of the previous month.

South Korea's foreign exchange reserves had decreased for two consecutive months from October to November last year. This was due to the foreign exchange authorities selling dollars to defend the exchange rate as the dollar strengthened amid concerns over the tariff policies of the second Trump administration. In early December, the won-dollar exchange rate surged further following a martial law situation, leading to continued dollar sales by the authorities. This raised concerns in the market that the $400 billion foreign exchange reserves might be breached.

However, contrary to concerns, the increase in foreign exchange reserves in December last year was due to the quarter-end effect, which saw an increase in foreign currency deposits by financial institutions. The quarter-end effect refers to foreign exchange banks typically depositing dollars with the Bank of Korea at the end of the quarter to meet the BIS ratio and improve capital soundness. Additionally, with the U.S. stock market boom contributing operational profits from stocks and bonds, dollar deposits among the components of foreign exchange reserves surged to $25.22 billion at the end of December, up $6.09 billion from $19.13 billion at the end of the previous month.

On the other hand, the dollar's strength led to a decrease in the dollar-converted value of other currency foreign assets, and dollar sales due to the authorities' volatility mitigation measures contributed to a decrease in foreign exchange reserves. As a result, securities, including government bonds, corporate bonds, and government agency bonds, among the components of foreign exchange reserves, stood at $366.67 billion at the end of December last year, down $5.72 billion from the previous month.

Additionally, Special Drawing Rights (SDR) at the International Monetary Fund (IMF) amounted to $14.71 billion at the end of December last year, down $180 million from the previous month, while the IMF position increased by $20 million to $4.2 billion.

A Bank of Korea official explained, "Despite the dollar's strength in December last year reducing the dollar-converted value of other currency assets and the implementation of volatility mitigation measures in the foreign exchange market, foreign currency deposits by financial institutions increased due to the quarter-end effect, and operational profits were generated, resulting in an increase in foreign exchange reserves." The U.S. dollar index rose about 2.0% in December.

As of the end of November last year, South Korea's foreign exchange reserves ranked 9th globally, unchanged from the previous month. China ranked first with $3.2659 trillion in reserves. Japan was second with $1.239 trillion, and Switzerland third with $925.1 billion. India ($659.4 billion), Russia ($616.5 billion), and Taiwan ($578 billion) followed.