High Dollar-Asset Exposure Risks for South Korea’s Won: Policy Tools & Lessons

The IMF’s latest Global Financial Stability Report introduces a metric measuring “currency-exposed dollar assets relative to foreign exchange market size (monthly trading volume),” designed as a structural indicator of how well a country’s FX market can absorb exchange-rate‐shocks across assets and institutions. South Korea scores about 25× on this metric, placing it in an upper tier among non-reserve currency economies and sixth among 20 countries surveyed; only Taiwan, Hong Kong, the Netherlands, Canada, and Norway exceed it.

Taiwan’s higher ratio (≈45×) reflects heavy dollar asset holdings—particularly overseas U.S. dollar bonds and securities—combined with a smaller FX market, which magnifies relative exposure even when absolute asset holdings are similar to Korea’s. By contrast, Japan, despite having the largest absolute stock of overseas dollar assets, has a ratio below 20× due to its much deeper FX turnover; major European economies generally have single-digit ratios, benefiting from reserve or quasi-reserve currency status, larger domestic investor bases, or larger FX markets.

Korea’s elevated ratio suggests several key risks. First, even modest shocks to the won-dollar rate or shifts in global funding costs could trigger outsized capital flows, pressure from institutions driven to hedge, and feedback loops magnifying volatility. Second, institutions with dollar liabilities (or assets) exposed will see balance-sheet risk escalate rapidly in stress, especially if forward hedging becomes widespread (“rush to hedge”), influencing forward‐market pricing and potentially triggering disorderly moves.

However, some counterbalances exist: Korea’s foreign exchange reserves remain large and have been judged by the IMF to be adequate to handle external shocks, and net external financial assets are high (≈ 43.9 % of GDP) which supports external soundness. Also, while Korea’s dollar asset exposure is high, the scale of liabilities and the composition of those exposures (public vs private, hedged vs unhedged) will determine actual vulnerability. The structure of Korea’s FX market and institutional capacity will matter in moderating shocks.

Strategic policy implications for Korean authorities include expanding FX market liquidity and depth, encouraging active hedging practices especially for large asset holders, monitoring institutional exposures, reviewing forward markets, and maintaining strong reserves. Another implication is that foreign investor behavior (both in dollar assets and in views of hedging) will be a critical amplifying factor. Open questions include the pace at which exposures are growing, the degree of hedging already in place but off balance-sheet, how Korea’s FX market compares in volatility and liquidity to comparators like Taiwan or Norway, and how these structural measures will respond to FX shocks vs macroeconomic policy shifts.