Foreign Exchange Reserve
Korea’s foreign exchange reserve reached a new high again to stoke controversy over the optimum level.
The Bank of Korea announced on May 8 that Korea’s foreign exchange holdings totaled US$355.85 billion as of the end of April, US$1.5 billion more than a month ago, to set a new high for the 10th consecutive month. The figure had been US$329.71 billion in July last year. “The value of the euro-denominated assets converted into the U.S. dollar rose last month due to the strong euro, and the foreign asset income increased at the same time to lead to the growth of the amount,” the central bank explained.
Under the circumstances, it is pointed out that Korea needs to manage the optimum level with its foreign exchange reserve second only to those of China, Japan, Switzerland, Russia, Taiwan, and Brazil at approximately 130 percent of the optimum level proposed by the IMF.
“We do refer to the recommendations from international organizations such as the IMF,” said the Bank of Korea, continuing, “However, it is not easy to fix the adequate amount because of the different conditions from country to country such as the degree of opening of the capital market, foreign liability structure, and geopolitical risks.”
Not a few experts are skeptical about the increase in foreign exchange reserve against international trade imbalances and forex market instabilities, in that it entails opportunity costs. “The increase in the reserve through issue of high-rate foreign exchange equalization bonds and investment in the low-rate U.S. Treasury bond is a kind of reverse margin,” said Hyeon Seok, research analyst at the Capital Market Institute.