South Korea’s foreign exchange reserves dropped to the lowest level in nearly five years in February as authorities intervened to stabilize the Korean won against the strong U.S. dollar.
The country’s forex reserves stood at $409.21 billion as of the end of February, down $1.8 billion from January, according to the Bank of Korea on Mar. 6. Forex reserves fell to the lowest level in four years and nine months since May 2020, when they were at $407.31 billion. The reserves declined for two straight months, previously falling $4.6 billion in January, adding up to $6.4 billion for the first two months of this year.
The central bank pointed to an increase in the forex swap line with the national pension fund as the main reason for the decline. The forex swap deal allows the state-run National Pension Service (NPS) to borrow U.S. dollars from the BOK’s forex reserves in exchange for the Korean won. When the pension fund obtains dollars through the central bank, demand for dollars in the foreign exchange market falls, which in turn helps curb the value of the won from depreciating further. The BOK emphasized that the reserve decrease is temporary, as the swapped dollars will be returned upon maturity.
When the value of the won plummeted, and the won-dollar exchange rate breached the 1,400 won mark in December after the martial law incident, the central bank raised the foreign exchange swap limit with the NPS from $50 billion to $65 billion.
The won-dollar exchange rate, based on the 3:30 p.m. day market close, climbed to 1,472.5 won at the end of last year. The rate stabilized within the 1,450-1,460 won range in January but briefly fell to 1,427.4 won on Feb. 24 following forex intervention. Recently, it shot up to around 1,440 won due to concerns over U.S. tariff policies and fears of a global trade war.
The appropriate size of forex reserves has been a subject of ongoing debate. Since forex reserves act as a cushion or safety barrier in case of a market shock, $400 billion is generally considered the minimal amount required for Korea. The current reserves remain above that level.
BOK Governor Rhee Chang-yong dismissed concerns that forex reserves had declined drastically after the won depreciated sharply following the martial law declaration. When the International Monetary Fund noted that Korea’s forex reserve adequacy index fell short of recommended levels, Rhee stressed that the assessments were only one factor in evaluating the country’s financial stability. “Korea holds the ninth-largest forex reserves in the world, so the IMF standard may not fully apply to our situation,” he said.
Despite the central bank’s reassurances, some experts remain cautious. Given South Korea’s sensitivity to foreign exchange crises—notably the 1997 Asian Financial Crisis—even a small decline in reserves raises concerns. Forex reserves serve as a buffer against balance of payments imbalances and volatility in foreign exchange markets.
“According to Bank for International Settlements guidelines, Korea should have approximately $920 billion in forex reserves, but the current level is less than half of that,” said Kim Dae-jong, a professor at Sejong University. He also noted that Korea’s forex reserves account for only 23% of GDP, lower than Taiwan’s 74% and Hong Kong’s 114%, which have similar economic structures.
