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South Korea ramps up forex reserves to record high

Scott Eells| Bloomberg | Getty Images

South Korea's currency reserves hit a record high in October in what analysts say is a clear sign that Seoul is determined to prevent a sharp appreciation of the won and build up its fire power to offset the impact of any tapering by the Federal Reserve.

According to data released on Tuesday by the Bank of Korea (BOK), the country's foreign exchange reserves stood at $343.23 billion at the end of last month, up $6.3 billion from the end of September and jumping by the biggest amount in about two years.

(Read more: South Korea central bank cuts growth outlook, eyes US impasse)

Analysts suspect the rise in reserves reflects central-bank intervention in the currency markets to curb a rise in the won, which has climbed almost 9 percent against the U.S. dollar since late June.

"The rise in South Korea's reserves is significant," said Mitul Kotecha, head of global currency research at Credit Agricole in Hong Kong.

"The South Korean authorities do not want their currency to appreciate too rapidly and so they have been intervening, particularly in recent weeks. It doesn't surprise me that there has been a build-up of reserves to reflect that," he added.

The won, trading at around 1,060 to the U.S. dollar on Tuesday, strengthened to around 1,054 last month, its strongest level in more than two years. The currency has been boosted by strong foreign demand for South Korean stocks and bonds, which have gained somewhat of a safe-haven status amid the recent turmoil in emerging markets.

(Read more: Emerging market reprieve is only temporary: Pimco)

"If you look at dollar/won at around 1,050, these levels have marked significant lows for dollar/won over the past few years," said Nizam Idris, managing director, head of strategy,fixed income and currencies at Macquarie Bank.

"The data confirms to us that the BOK bought quite a bit of dollars at that sort of level. It seems like it [1,050] could be a clear line in the sand for the BOK," Idris added.

South Korea's economy is heavily dependent on exports to drive growth. Currency strength, which dents exporter competitiveness, is something that is watched closely.

Indeed, South Korea's Finance Minister Hyun Oh-seok warned last month that recent won strength had been excessive.

Analysts said the jump in foreign exchange reserves also possibly reflected a wish to build up a buffer against any sharp outflow of funds in the event of a pull-back in U.S. monetary stimulus.

(Read more: Taper tease? Market worries Fed will end easing)

Emerging markets have been jolted this year by Fed tapering worries. Still, there has been some calm in recent weeks as investors pushed back their expectations for when the U.S. central bank was likely to start scaling back its $85-billion-a-month asset purchase program.

"I think the BOK is using this as an opportunity to build up a buffer for when taper comes back onto the agenda again and there is pressure on Asian currencies," Idris added.

— By CNBC.com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC

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