South Korea's FX Reserves Hit a Four-Year High Despite a Stronger Dollar

South Korea's foreign exchange reserves rose to $443.16 billion at the end of October, the Bank of Korea said on Nov. 4. That is $2.6 billion more than at the end of September and the highest level since May 2022, a span of four years and five months. It also beat this year's previous high, set in August at $442.28 billion.

What makes the increase notable is that October was a month when the US dollar got stronger, which normally pulls reserve totals down. This post explains what the reserves are, why they rose anyway, and what they are made of.

What foreign exchange reserves are

Foreign exchange reserves are the foreign-currency assets a central bank keeps on hand to stabilize the currency market and meet external payments. Think of them as a country's emergency savings in foreign money. If the Korean won suddenly weakens sharply, or if banks and companies struggle to get dollars, the authorities can sell some of these assets to supply dollars and calm the market.

Large reserves signal that a country can withstand a sudden outflow of capital. South Korea learned this the hard way in 1997, when its reserves ran dry during the Asian financial crisis and it had to turn to the International Monetary Fund for a bailout. Since then, the country has built its reserves up steadily, and the monthly figure, released by the Bank of Korea early each month, is treated as a quick read on the economy's external defenses. That is why investors and credit rating agencies watch them closely when they judge a country's external stability.

Foreign exchange reserves: external assets that monetary authorities can use immediately, such as foreign government bonds, deposits, gold and claims on the International Monetary Fund.

How October compares

Reserves rose for three straight months from June to August, then fell by $1.72 billion in September. At the time, the Bank of Korea said the drop reflected assets placed with a Korea-US strategic investment corporation. October's increase reversed that decline within a month.

Why reserves rose while the dollar strengthened

The dollar index, which measures the dollar against six major currencies, rose from 101.37 at the end of September to 102.04 at the end of October, a gain of about 0.7%. Over the same period, the euro fell 1.3% and the yen fell 0.2% against the dollar.

Korea's reserves include assets held in currencies other than the dollar. When the dollar strengthens, those assets are worth fewer dollars once they are converted, so a stronger dollar usually shrinks the reported total. In October, that effect was outweighed by other factors. The Bank of Korea said the increase came mainly from returns on its foreign currency investments and from a rise in foreign currency deposits that financial institutions placed with the central bank.

You can see this in the breakdown. Deposits, the most cash-like part of the reserves, jumped by $6.32 billion in a single month.

Foreign currency deposits: foreign-currency funds that commercial banks and other financial institutions park at the central bank. When they rise, the deposit line in the reserves grows.

What the reserves are made of

At the end of October, securities such as government bonds, agency bonds and corporate bonds made up 86.3% of the total at $382.43 billion, down $3.59 billion from September. Deposits totaled $36.27 billion, or 8.2%. Special drawing rights from the IMF stood at $15.41 billion (3.5%), gold at $4.79 billion (1.1%), and the IMF reserve position at $4.25 billion (1.0%).

Gold is the most interesting line. In these statistics, gold is recorded at book value, meaning the price paid when it was bought, not today's market price. That is why gold holdings stayed at exactly $4.79 billion even though gold prices have moved a lot. Changes in the gold price do not show up in the headline reserve figure.

Special drawing rights (SDR): an international reserve asset created by the IMF that member countries can exchange for other members' currencies when they need them.

What to watch next

The first question is whether the increase continues when November data come out early next month. If the dollar keeps strengthening, the conversion effect will keep pushing the total down. The second is whether the jump in deposits lasts. Deposits placed by financial institutions can move quickly with market conditions, so next month's deposit figure will show whether October's gain was a one-off. The third is the exchange rate itself: if the won weakens sharply, the authorities may step in to steady the market, and that kind of intervention tends to reduce reserves.

Key takeaway

South Korea's foreign exchange reserves rose $2.6 billion in October to $443.16 billion, the highest since May 2022. Investment returns and higher deposits from financial institutions more than offset the drag from a stronger dollar, and gold stayed flat at $4.79 billion because it is recorded at book value.

Sources: Bank of Korea