Reserves Management and FX Intervention

Abstract

Korea’s FX reserves have increased steadily since 2008, to a total of $404 billion as of the end of 2018. This has helped reduce private foreign currency funding costs and exchange rate volatility by contributing to a stable sovereign credit rating. In turn, this has helped to stabilise domestic financial and economic conditions.

Korea’s FX authorities have consistently adhered to the principle that the exchange rate should be determined by market forces that reflect economic fundamentals and FX supply and demand. Measures to stabilise the market are carried out only in exceptional circumstances, when there are excessive fluctuations in the exchange rate over a short period of time. FX market intervention is believed to effectively reduce market volatility by calming market sentiment through the use of intervention tools customised to specific circumstances such as temporary herd behaviour. Details of interventions are not disclosed, as they might affect market participants’ expectations. However, the authorities have recently decided to release the net dollar-won trading volumes, in order to increase transparency of FX policies in line with global standards.

The Bank of Korea (BOK) decides on the composition of the FX reserves based on its investment objectives, the neutral currency composition and market forecasts. The BOK also has worked to improve its risk management techniques for each type of risk factor and it has expanded its use of external managers to enhance the efficiency of its reserve management.

Full Publication: Reserve Management and FX Intervention

Keywords: Korea’s FX reserves, FX reserves accumulation, FX market intervention, disclosures, FX reserves portfolio

JEL Classification: E58, F31, G11