Foreign currency reserves hit another monthly record
Korea’s foreign exchange reserves hit a record in December, the seventh consecutive monthly all-time high. The record is attributed to the weak dollar against the won in recent months.
At the end of December, Korea held $443.1 billion in foreign currency, up $6.72 billion on month, according to the Bank of Korea. From June, records have been repeatedly broken. Based on data from the last week of November, when the value was $436.4 billion, Korea ranks No. 9 globally.
“As the dollar weakens, the total converted dollars of all foreign currencies have increased. The record is attributable to the increasing deposits in checking accounts and profits from managing the foreign currency assets,” the bank said in a statement.
There are various reasons for the increase in foreign currency reserves. The assets are bound to increase naturally when the government continues to buy assets in foreign currencies. External factors, such as the change in the value of the currencies, also affect the reserves.
The central bank owns six types of foreign currencies, including the dollar, euro, pound, yen, Australian dollar and the Canadian dollar. For the statistics on the foreign currency reserve, the central bank usually converts all the holdings to a dollar value. Hence, the value of the dollar affects the size of Korea’s foreign currency reserves.
The weakening dollar against the won played a role in the rise in the amount of Korea’s foreign currency holdings. The dollar has been steadily weakening since March because of the excessive liquidity in the market. The U.S. government and the Federal Reserve have been pumping out dollars in order to prevent the economy from stalling amid the virus pandemic.
The dollar index, which measures the value of the dollar against a basket of foreign currencies, fell from 102.8 in March to 89.68, or 13 percent, during the last week of December. The euro, pound, yen and Australian dollar all rose against the dollar during the last week of December.
As the amount of foreign currency holdings increases, the debate surrounding the optimal amount is expected to arise. Foreign currency holdings are essential emergency funds for correcting the imbalance in international payments and preparing for a range of crises, but more is not necessarily merrier. Possession of foreign currencies comes with costs.
In order for the government to buy foreign currencies, it needs to issue bonds and buy assets that are sold in foreign currencies with the won gained from the bonds. Since the government needs to pay interests to the buyers of the bonds, foreign currency holdings can breed national debt. Furthermore, an opportunity cost is paid when investing in foreign currencies as risk-free assets.
BY YOUN SANG-UN [firstname.lastname@example.org]
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