Foreign Exchange Reserves Fall $10.5 Bil. in July

Foreign exchange reserves plunged 10.58 billion U.S. dollars last month due to government intervention in the market.

The Bank of Korea said yesterday that foreign exchange reserves fell 4.1 percent from late June to reach 247.26 billion dollars in late July, matching the amount in April last year.

The drop was the sharpest month-on-month decrease in foreign exchange reserves since 1997, when the figure fell 20 percent in November and another 16.4 percent in December.

The fall was also the biggest in amount since 1971, when Korea began recording the statistic.

Thanks to the current account surplus and foreign investment in stocks and bonds flowing into the country after the 1997 Asian financial crisis, the amount of foreign currency skyrocketed from 8.87 billion dollars in late 1997 to a record high 264.25 billion dollars in March this year.

State intervention was cited for the steep drop in foreign exchange reserves, as the government and the central bank sold dollars after announcing more efforts to stabilize the foreign currency market early last month.

Forex experts estimate the central bank sold 21 billion dollars more than 18 times last month.

Korea’s foreign exchange reserves also fell 4.12 billion dollars over the first six months of the year due to state intervention and government redemption of the principal of forex stabilization bonds worth 3.2 billion dollars issued in the late 1990s.

Central bank official Ahn Byeong-chan said, “The amount of foreign exchange reserves calculated in dollar terms fell as the government needed to intervene to stabilize the foreign exchange market, and because the value of other major currencies, including the Japanese yen and euro, also fell against the dollar from late June.”

In late June, Korea ranked sixth worldwide in foreign exchange reserves, but the fall in foreign exchange reserves has caused worry in the market.

Park Hae-shik, senior researcher at the Korea Institute of Finance, said, “As a result of state intervention, the current account deficit, and foreign net sales of stocks and bonds, Korea’s foreign exchange reserves fell drastically in July. The amount of decrease, however, was smaller than market estimates.”

“Amid sluggish economic conditions, a decrease in foreign exchange reserves could send bad signals to the market.”