(Bloomberg) — South Korea will cut its foreign exchange stabilization fund by more than 30 percent next year, a record amount that the government says is still enough to defend the won.
The move came after the South Korean currency fell 3.7 percent against the U.S. dollar over the year to the end of August, making it the second-worst performer in Asia after the Taiwanese dollar.
“The amount of foreign exchange reserves is sufficient and the size of the fund’s assets is also sufficient to respond to the foreign exchange market,” Hee Jae Kim, director of the foreign exchange market department of South Korea’s finance ministry, said in a telephone interview with Bloomberg News on Monday.
“A reduction in the size of the fund does not necessarily mean a reduction in its responsiveness to the foreign exchange market,” he added.
The government plans to cut the foreign exchange stabilization fund to 140.3 trillion won ($104.6 billion) from 205.1 trillion won ($104.6 billion) in 2025. The cut is the deepest reduction in the fund since it was established in 1967 to counter excessive volatility of the won.
“The impact of a reduction would be minimal as foreign exchange reserves are currently more than three times the size of South Korea’s short-term foreign debt,” said Min Gyeong-won, an economist at Woori Bank in Seoul. “If the won falls, companies would sell dollars from their foreign currency deposits. If the currency rises, retail investors’ demand for dollars to invest in foreign stocks would follow.”
The won’s fluctuations have made South Korean authorities nervous this year. In April, the Finance Ministry’s International Financial Bureau and Oh Kum-hwa, director general of the Bank of Korea’s international department, sent a joint text message saying they were closely monitoring exchange rate movements after the currency’s value fell to 1,400 per dollar – its lowest level since 2022.
The government has extended the currency’s trading hours since July to allow its stocks and bonds to be included in more global indices. However, times of lower liquidity also mean greater volatility.
The Korea Economic Daily had previously reported that the government plans to reduce the size of the fund.
(Adds a diagram and a quote from Woori in the sixth paragraph.)
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