South Korea's foreign exchange reserves fell by approximately $4 billion last month, marking the largest monthly decline in 11 months. The drop came as foreign exchange authorities deployed dollar reserves to defend the won after the won-dollar exchange rate surged in the wake of the U.S.-Iran war. Notably, as of the end of February, Korea's foreign reserve ranking slipped outside the global top 10 for the first time since 2000.
According to data released by the Bank of Korea (BOK) on Thursday, the country's foreign reserves stood at $423.66 billion (approximately 641 trillion won) at the end of last month, down $3.97 billion from the previous month. This was the steepest decline since April last year, when reserves fell by $4.99 billion following the U.S. reciprocal tariff announcement that sent the won-dollar exchange rate soaring.
Foreign reserves had rebounded in February for the first time in three months, partly due to the government's new issuance of foreign exchange stabilization bonds. However, the upward trend did not continue.
A BOK official explained, "The strong dollar driven by the Iran war reduced the dollar-converted value of foreign currency assets denominated in other currencies. Foreign exchange market stabilization measures, including the National Pension Service swap arrangement and other FX swaps, were also executed simultaneously, contributing to the decline in reserves."
Typically, when the won-dollar exchange rate rises, foreign exchange authorities sell dollars from reserves to stabilize the market, which reduces foreign reserves. Additionally, during periods of elevated exchange rates, the National Pension Service (NPS) obtains dollars through its currency swap arrangement with the BOK for overseas investments rather than converting currency in the open foreign exchange market, a process that also draws down reserves.
The decline was particularly steep as the won-dollar exchange rate, which had fallen to the 1,420 won range at the end of February, surged to around 1,530 won by the end of last month following the outbreak of the U.S.-Iran war, analysts noted.
By asset category, securities including government bonds and corporate bonds fell by $2.26 billion to $377.69 billion. Deposits declined by $1.44 billion to $21.05 billion, and the International Monetary Fund (IMF) Special Drawing Rights (SDR) decreased by $200 million to $15.57 billion.
As of the end of February, Korea's foreign reserves totaled $427.6 billion, placing the country 12th globally. The ranking dropped two spots from 10th in January. This marks the first time Korea has fallen outside the top 10 since the BOK began compiling country-by-country statistics in the 2000s.
Italy and France moved up to eighth and ninth place, respectively, overtaking Korea to enter the top 10. Both countries benefited significantly from rising gold prices. As the world's third- and fourth-largest gold holders, the two nations value gold at market prices when calculating foreign reserves. Korea, by contrast, values its gold holdings at purchase price, meaning rising gold prices do not translate into higher reserve figures.
"Some countries value gold at market prices when assessing foreign reserves, and since gold prices have risen this year, their rankings have improved," a BOK official said.
However, some observers note that Korea's absolute dollar holdings remain large enough that an immediate crisis is not a concern. In particular, analysts point out that the effect of selling dollars to calm the exchange rate is effectively limited in a market dominated by extreme uncertainty, where a single remark from President Donald Trump can rattle entire markets.
"With foreign reserves exceeding $400 billion, the level remains sufficient relative to the scale of intervention despite the recent decline, so this is not yet a stage where adequacy should be a concern," said Kang Hyun-joo, a senior research fellow at the Korea Capital Market Institute.
Korea's inclusion in the FTSE World Government Bond Index (WGBI) this month is also seen as a positive factor for exchange rate defense. Bond market traders say that an influx of Japanese investment capital in particular is generating a strong foreign exchange inflow effect. A government official said, "Most global institutions agree that the Korean economy has strong fundamentals, so once the Iran war variable is removed, the exchange rate is expected to stabilize."