NextGenInsight.Net

Currency Reserves in Peril

March 7, 2025

Billy Yang

● Korea’s Reserves – Below \$410B, Alarm Bells Ring

The background of the foreign exchange reserves decreasing for three consecutive months and recording the lowest in 4 years and 9 months, as well as the impact on the overall economy and response strategies, are detailed. This examines the impact of the recent strong dollar phenomenon and the decrease in foreign exchange reserves on the Korean economy, foreign exchange market intervention strategies, gold holding policies and international comparisons, and how all these variables will affect future monetary policy, domestic demand, and the global economy in chronological order.

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[① Status and Background of Foreign Exchange Reserves Decrease]
• Foreign exchange reserves have decreased sharply for the last 3 months.
• Recorded the lowest level since May 2020.
• This is the result of actively utilizing foreign exchange reserves for defense purposes as the strong dollar phenomenon continues.

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[② Causes and Detailed Items of Foreign Exchange Reserves Decrease]
• The main reason for the decrease in reserves is the increased use of dollars due to the expansion of the National Pension Service and foreign exchange swaps.
• The outflow of dollars from holdings such as US Treasury bonds, agency bonds, and asset-backed securities has also had an impact.
• At the same time, foreign exchange components such as the IMF position have also decreased slightly.
• This change leads to a reduction in foreign exchange reserves as emergency funds, which poses a risk of reducing the ability to respond to crisis situations.

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[③ Strong Dollar Phenomenon and Foreign Exchange Market Intervention]
• As the strong dollar trend continues, the exchange rate has risen from 130 won to 150 won.
• The foreign exchange authorities implemented policies to purchase won and increase the supply of dollars to defend against the won's depreciation.
• In the process, foreign exchange reserves were depleted, reducing the capacity for additional intervention.
• As a result, if the strong dollar continues, it is likely to lead to an increase in import prices, a contraction in domestic demand, and price instability.

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[④ Gold Holding Policy and International Comparison]
• Major central banks around the world are increasing their gold reserves in preparation for financial crises.
• On the other hand, Korea has been passive in expanding gold holdings during the recent period of declining gold prices.
• In international comparisons, Korea's gold holding ratio is 2.09%, which is significantly different from the United States (74.1%), Italy, France, etc.
• These policy differences can put a burden on maintaining foreign exchange soundness, and in the long term, it seems necessary to expand gold holdings.

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[⑤ Monetary Policy Dilemma and Impact on the Overall Economy]
• The reduction in emergency funds due to the depletion of foreign exchange reserves leads to a weakening of the ability to respond in crisis situations.
• If the strong dollar trend continues, the increase in import prices will directly put pressure on consumer prices.
• Easing of monetary policy and expansion of fiscal policy are required at the same time, but the capacity to respond is limited due to the deterioration of foreign exchange soundness.
• As a result, there is a risk that the stagnation of domestic demand and the monetary policy dilemma will worsen, making it vulnerable to future global economic and financial crises.
• Currently, the Korean economy is at a critical crossroads where it must withstand global economic exchange rate fluctuations and financial crises.

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[⑥ Conclusion and Outlook]
• The decrease in foreign exchange reserves is not simply a numerical problem, but is intertwined with various variables such as the strong dollar and the resulting exchange rate fluctuations, domestic demand recession, and monetary policy dilemma.
• In the short term, a defense strategy through foreign exchange market intervention is expected to continue, but in the long term, a systematic response such as strengthening foreign exchange soundness and expanding gold holdings is necessary.
• In this situation, the uncertainty of the global economy is increasing, and the possibility of a financial crisis cannot be ruled out.
• In the future, fiscal policy, monetary policy, and the central bank's foreign exchange management strategy must be closely coordinated, and consumers and businesses alike need to prepare for crisis situations.

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< Summary >

Comprehensive Economic Outlook

Status of Foreign Exchange Reserves Decrease

Foreign exchange reserves have decreased for three consecutive months, recording the lowest in 4 years and 9 months.
The use of dollars has increased to defend against the strong dollar trend, leading to the depletion of foreign exchange reserves.

Causes of Decrease and Foreign Exchange Market Intervention

This is the result of the expansion of the National Pension Service and foreign exchange swaps, and the decrease in holdings such as US Treasury bonds.
Foreign exchange reserves are being rapidly depleted due to intervention to defend the won.

Gold Holdings and International Comparison

Major central banks around the world are increasing their gold holdings, while Korea has a low holding ratio.
Improvements are needed to maintain foreign exchange soundness.

Monetary Policy Dilemma and Outlook

The ability to respond to crisis situations is weakening due to the reduction in emergency funds, and there is a possibility of rising import prices and a contraction in domestic demand.
Policy coordination will be required in the future depending on variables such as the global economy, financial crisis, monetary policy, exchange rate fluctuations, and domestic demand.

*YouTube Source: [경제 읽어주는 남자(김광석TV)]

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● Korea’s Reserves – Below \$410B, Alarm Bells Ring The background of the foreign exchange reserves decreasing for three consecutive months and recording the lowest in 4 years and 9 months, as well as the impact on the overall economy and response strategies, are detailed. This examines the impact of the recent strong dollar…