Korea's won-dollar exchange rate faces volatility risk during global turmoil, IMF report warns

Korea’s won-dollar exchange rate could become highly volatile during global financial turmoil because the country holds large amounts of dollar assets that are sensitive to exchange rate changes, the IMF said in a report.

Foreign visitors exchange currency at a money exchange in Myeongdong, central Seoul on Jan. 18. [NEWS1]

Korea’s won-dollar exchange rate could become highly volatile during global financial turmoil because the country holds large amounts of dollar assets that are sensitive to exchange rate changes, the International Monetary Fund (IMF) said in a report.

Korea’s dollar-denominated assets exposed to exchange rate risk amount to about 25 times the country’s monthly foreign exchange trading volume, according to the IMF's "Global Financial Stability Report" released in October last year.

The ratio of currency-exposed dollar assets to a country's foreign exchange market serves as a structural indicator of how well its foreign exchange market can absorb currency shocks.

Among major economies, Korea ranked alongside Canada and Norway in terms of a relatively high ratio of currency-exposed dollar assets to the size of the foreign exchange market.

Norway also maintains a high share of overseas investments through its sovereign wealth fund. Japan holds the largest volume of dollar assets, but the size of its foreign exchange market keeps the ratio of dollar assets to market turnover below 20. Major European economies such as Germany, France and Italy recorded single-digit ratios.

Taiwan recorded the highest ratio of currency-exposed dollar assets relative to its foreign exchange market at about 45. Taiwan holds a volume of dollar assets similar to Korea’s, but its smaller foreign exchange market pushes the ratio higher.

"In some economies, dollar exposures are disproportionately large relative to the depth of the local foreign exchange market," the IMF said in its Global Financial Stability report.

The imbalance poses particular risks for non-reserve currency countries such as Korea and Taiwan, which may struggle to absorb shocks from dollar fluctuations over short periods.

Dollar banknotes are seen in this illustration taken on March 19, 2025. [REUTERS/YONHAP]

The report also warned that global investors may "rush to hedge" risk at the same time.

"Selling the dollar forward could increase dollar funding pressures, especially in shallower foreign exchange markets with limited hedging instruments and where absorption capacity for hedging flows is lower," the report read.

In a similar vein, the Korean National Pension Service's recent move to accelerate its strategic currency hedging efforts can be interpreted as an effort to mitigate currency-related risks. At the same time, the issue has highlighted risks that extend beyond individual investment decisions, as retail investors who buy overseas stocks without hedging currency risk may also contribute to broader macroeconomic volatility.

In response, the government said late last year that it would offer forward dollar-selling products to retail investors through securities firms as part of a package of tax measures aimed at supporting domestic investment and stabilizing the foreign exchange market.

Officials said that when individuals sell dollars forward to hedge currency risk, banks supply immediately deliverable dollars to the market to match the transactions, a process expected to reduce exchange rate risk while helping to stabilize the foreign exchange market.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom. BY JEONG JAE-HONG [paik.jihwan@joongang.co.kr]