By Lee Yeon-woo

Korea’s foreign exchange reserves have dropped for the second consecutive month, as a consequence of the unstable won-dollar exchange rate because of the increased probability of prolonged high-interest-rate policies by the U.S.

Following the government’s efforts to defend the depreciating Korean won, the country has slipped to ninth in the global ranking of foreign exchange reserves.

According to data from the Bank of Korea (BOK), Friday, Korea’s foreign exchange reserves stood at $414.12 billion as of September, a decrease of $4.18 billion from the previous year. This marks the lowest level since last October when the strong dollar pushed the won-dollar exchange rate into the 1,400 won range.

A sharp depreciation of the Korean won prompted foreign exchange authorities to draw from reserves to stabilize the currency. The U.S. dollar index, which gauges the value of the dollar against six major currencies, surged 3 percent month-on-month, reaching 106.23. Accordingly, the won-dollar exchange rate jumped to 1,349.3 won in September from 1,323.4 won in August.

“The decrease stems from multiple factors, including a drop in the U.S. dollar-equivalent value of other foreign currency assets, and efforts to counteract fluctuations in the foreign exchange market,” an official from the BOK explained.

Despite occasional fluctuations, the volume of foreign exchange reserves in Korea has been trending downwards. In September 2022, the reserves even fell at the steepest rate since the global financial crisis in 2008, dropping by $21.8 billion month-on-month.

The BOK dispelled worries last year, by noting that “the current reserves ($414 billion) are approximately double that of 2008,” when the foreign exchange experienced the most substantial decline.

However, experts are concerned about the downward trend, especially given the current heightened external volatility, which stems from a continual U.S. monetary tightening.

“If the global shortage of dollars intensifies, the exchange rate of the Korean won will inevitably climb even higher. It is projected that the rate might hit the 1,400 won range by the end of this year,” said Kim Dae-jong, a business professor at Sejong University, adding that Korea should also be prepared for the upcoming volatility.

“Countries like Hong Kong, Singapore, and Switzerland fortify themselves against potential crises by amassing foreign reserves exceeding 100 percent of their gross domestic product (GDP). Taiwan, whose economy is structurally similar to Korea’s, maintains stability in foreign exchange by holding reserve equivalent to 70 percent of its GDP,” Kim added.

Sung Tae-yoon, an economics professor at Yonsei University, emphasized the challenges in determining the adequate amount of foreign exchange reserves for a country.

“Even if a nation amasses foreign exchange reserves beyond the recommended level set by the IMF, it doesn’t guarantee stability. If both domestic and foreign conditions deteriorate, it indicates that those reserves might still be insufficient to stabilize the foreign exchange market,” Sung stated, underscoring the need for vigilance in monitoring both the foreign exchange market and reserve fluctuations.

In the wake of this decline, Korea’s foreign exchange reserves have dropped to ninth place globally, with Hong Kong moving up to eighth. Despite a reduction of $44.2 billion, China retained its leading position with reserves of $3.16 trillion. Meanwhile, both Japan and Switzerland saw decreases in their reserves, amounting to $1.25 trillion and $860 billion, respectively.