South Korea is set to reduce the size of its foreign exchange stabilization fund by more than 30% next year, marking the largest cut in the fund’s history. Despite the reduction, the government maintains that the fund remains sufficient to defend the won.
The decision comes as the South Korean currency has declined 3.7% against the US dollar year-to-date through the end of August, making it the second-worst performing currency in Asia, trailing only the Taiwanese dollar.
Hee Jae Kim, director of the foreign exchange market division at South Korea’s finance ministry, assured that the country’s foreign exchange reserves and the fund’s assets are adequate to manage the foreign exchange market. “A reduction in the size of the fund does not necessarily imply a reduction in its ability to respond to the foreign exchange market,” Kim told Bloomberg News in a phone interview.
The government’s plan will see the foreign exchange stabilization fund slashed to 140.3 trillion won ($104.6 billion) in 2025, down from the 205.1 trillion won allocated this year. This cut represents the most significant reduction in the fund since its establishment in 1967 to combat excessive volatility in the won.
Min Gyeong-won, an economist at Woori Bank in Seoul, downplayed the impact of the reduction, noting that the current foreign exchange reserve is more than three times the size of South Korea’s short-term external debt. “If the won falls, corporations would sell dollars from their FX deposits. If the currency rises, dollar demand from mom-and-pop investors for overseas stock investments would follow,” Min explained.
This year, the won’s fluctuations have raised concerns among South Korean authorities. In April, after the currency fell to 1,400 per dollar—the lowest level since 2022—the finance ministry’s international finance bureau and the Bank of Korea’s international department issued a joint statement, saying they were closely monitoring exchange rate movements.
In a move aimed at increasing the inclusion of South Korean stocks and bonds in global indexes, the government extended the won’s trading hours in July, although this could lead to greater volatility during periods of lower liquidity.
The Korea Economic Daily was the first to report the government’s plan to trim the fund’s size.