South Korea's Historic FX Fund Cut Amidst Won Volatility
South Korea is set to make a significant and historic adjustment to its foreign exchange stabilization fund in 2025. According to Bloomberg, the government has announced a reduction of over 30% in the size of this fund, slashing it from 205.1 trillion won to 140.3 trillion won. This decision, representing the largest cut since the fund's establishment in 1967, comes in response to ongoing volatility in the South Korean won, which has depreciated by 3.7% against the US dollar this year, making it one of the weakest-performing currencies in Asia.
Hee Jae Kim, the director of the foreign exchange market division at South Korea’s finance ministry, reassures that despite this reduction, the remaining funds are more than adequate to manage foreign exchange market fluctuations. Kim emphasized in a Bloomberg interview that the reduction in the fund's size does not equate to a diminished capability to respond to market changes. "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,” Kim stated.
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Economists, including Min Gyeong-won from Woori Bank, suggest that the impact of this fund reduction will be minimal. The current foreign exchange reserves, which are over three times South Korea's short-term external debt, should provide a robust buffer against potential market shocks. Gyeong-won highlighted that the move should not severely affect market stability, given that corporations can draw on their FX deposits if needed, and fluctuations in the won will also influence retail investors’ dollar demand for overseas investments.
The won's recent performance has been a concern for South Korean authorities, especially after it fell to 1,400 per dollar in April, its lowest point since 2022. In response, the government has extended the currency’s trading hours and is working to include its stocks and bonds in more global indexes, though this could increase market volatility during periods of lower liquidity.
The reduction in the foreign exchange stabilization fund reflects a strategic approach by South Korea's government to manage currency volatility while maintaining sufficient reserves to stabilize the won. As global economic conditions evolve, including potential US interest rate cuts, South Korea’s measures aim to navigate the complexities of currency management and market stability effectively.
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