IMF Warns Korea's Dollar Assets Outpace Currency Market Capacity by Nearly 25 Times

A Large Dollar Exposure Meets a Shallow Currency Market

South Korea's assets denominated in US dollars and exposed to exchange rate changes are nearly 25 times the size of its onshore foreign exchange market, according to the International Monetary Fund's Global Financial Stability Report. That gap leaves the market with limited capacity to absorb a sudden wave of transactions by investors trying to protect their overseas holdings.

As of January 18, 2026, the warning has gained renewed attention as the won moves toward 1,480 per dollar despite efforts to stabilize it. The currency was trading around 1,400 when the IMF published its report in October. It subsequently fell to levels described as near crisis territory in late December, briefly recovered following intervention on December 24, and came under pressure again.

The IMF's concern centers on the relationship between the scale of dollar investments and the depth of the market used to manage their currency risks. Korean companies and financial institutions have accumulated substantial dollar assets through decades of growth driven by exports and investment abroad. The domestic market for protecting those holdings against exchange rate changes has not kept pace.

A foreign exchange market connects people and institutions buying one currency with those selling another. Its depth describes how readily it can handle transactions without sharp price changes. Korea's large overseas portfolios can generate demands that are difficult for its local market to absorb when many investors act together.

The warning reaches beyond the latest exchange rate. It concerns whether banks and investors can obtain dollars and manage currency exposure smoothly during turbulence, when ordinary trading conditions may suddenly disappear.

How Korea Compares With Other Economies

Canada and Norway have ratios similar to Korea's, at around 25 times. Their large sovereign investment and pension portfolios help explain why their dollar holdings are substantial relative to their domestic foreign exchange markets. Korea's position therefore sits alongside other economies with considerable investments abroad.

Taiwan's ratio exceeds 45 times, reflecting a smaller currency market relative to its dollar assets. Using the approximate figures of 45 and 25, Taiwan's multiple is more than 1.8 times Korea's. Both economies are major exporters with substantial foreign reserves, yet neither has the market liquidity associated with a major reserve currency.

Japan holds the largest amount of dollar assets in absolute terms, but its ratio is approximately 15 times. Its deeper foreign exchange market and the yen's status as a global reserve currency provide more liquidity and a wider range of tools for managing currency risks. On the figures given, Korea's multiple is roughly 1.7 times Japan's.

Germany, France and Spain record ratios in single digits. They benefit from the euro's reserve currency status and closely integrated financial markets. A reserve currency is widely held and used internationally, helping support a large pool of buyers, sellers and financial services.

The comparisons put market capacity at the center of the issue. An economy can hold a large volume of overseas assets while also having a market capable of handling substantial transactions. Korea and Taiwan face greater pressure when the demand to manage those assets grows faster than local trading capacity, leaving them exposed to sudden capital movements and speculative pressure.

What Happens During a Rush to Hedge?

Institutional investors use hedging to reduce the effect of exchange rate movements on their portfolios. A forward contract, one common tool, fixes today the exchange rate for a currency transaction that will take place later. The investor gains greater certainty about the value of an overseas holding in its home currency.

Dollar assets, dollar payments and the banks arranging these contracts create different currency needs. An investor hedging a dollar asset can sell dollars forward, while a bank managing the resulting position may need dollar funding. Stress can therefore spread from the market for contracts into the market for obtaining dollars.

The IMF warned that heavier selling of dollar forwards can intensify dollar funding pressure. This activity accelerated after Washington's sweeping tariff announcements in April, showing how a change in trade policy can quickly increase demand for protection against currency movements.

Korean exporters and investors are exposed to such shocks because trade and overseas investment are central to their businesses. During ordinary conditions, banks can arrange hedges and manage their own positions smoothly. When many large institutions seek protection at once, the size of their combined demands can strain the system.

Banks scrambling to cover positions may push up the cost of obtaining dollars. Currency weakness, changes in hedging demand and more expensive dollar funding can then reinforce one another, making it harder to restore orderly trading.

International banks can also retreat toward their home markets during a global crisis. If Korean institutions need to hedge billions of dollars of assets while those banks are pulling back, local liquidity could shrink sharply. Finding an exchange rate at which enough buyers and sellers are willing to trade could become difficult, producing abrupt price swings and a shortage of usable funding.

The Won's Decline and the Policy Response

The won recently closed onshore trading at 1,473.6 per dollar, giving up gains from the previous session. That brief improvement followed remarks by US Treasury Secretary Scott Bessent, who said the currency's recent decline was out of line with Korea's strong economic fundamentals.

Bessent's intervention offered a temporary confidence boost, but the renewed decline showed that the underlying demand for dollars and supply of won remained a problem. The main developments described through January 18 follow this sequence:

• April: Washington's sweeping tariff announcements were followed by increased selling of dollar forwards.
• October: The IMF published its Global Financial Stability Report while the won was trading around 1,400 per dollar.
• Late December: The won fell toward levels described as near crisis territory.
• December 24: Market intervention was followed by a brief recovery.
• By January 18, 2026: The won was again moving toward 1,480, with a recent onshore close of 1,473.6.

South Korean authorities have extended the National Pension Service's strategic currency hedging arrangement with the central bank. The arrangement is intended to contain risks associated with the pension fund's large overseas investments and reduce the need for disruptive transactions in the open market during stress.

The government is also preparing products through major brokerages that would let individual investors sell foreign currency forward. Officials hope accessible hedging tools will smooth the currency flows associated with purchases of overseas stocks.

Why Retail Investment Matters

Korean individuals buying US equities create demand for dollars because those shares are purchased in the US currency. These investors, locally known as Seohak Ants, have been directing money into American stocks and contributing to persistent dollar buying in Korea's market.

The proposed retail products would give individuals another way to manage the exchange rate risk attached to their overseas portfolios. They are part of an effort to address investment flows as well as the immediate movement of the won. No launch date for the products or timetable for additional international support was given.

The National Pension Service arrangement addresses a much larger institutional portfolio, while the brokerage initiative targets the combined activity of individual investors. Both measures seek to make currency transactions more manageable, but the won's renewed weakness indicates that they have so far had limited success in reversing the pressure.

Bank of America argued that Korea's current measures were insufficient to arrest the decline. Its assessment warned that political pressure to stabilize the won would increase if depreciation continued. It suggested that stronger measures affecting capital flows, including tax incentives to encourage money into Korea or discourage outflows, might be needed.

Could International Dollar Support Help?

Citi highlighted a need for stronger international coordination, particularly with the United States. It suggested that Korean authorities could seek arrangements supporting trade and financial stability, including a possible foreign exchange swap.

Citi described the possible support in these terms:

symbolic FX backstops such as a form of FX swap

A currency swap arrangement can provide access to another currency during funding stress. An unlimited arrangement of the kind associated with the 2008 global financial crisis was considered unlikely in the current environment, leaving other forms of support under discussion.

Citi also pointed to the Federal Reserve's Foreign and International Monetary Authorities repo facility. Under that mechanism, South Korea could use holdings of US Treasury securities as collateral to obtain dollar liquidity. Collateral is an asset pledged as security when money is borrowed.

The repo option would turn Treasury holdings into access to dollars during market stress. That could give authorities another means of meeting funding needs when ordinary market channels become expensive or unreliable.

Such arrangements could also strengthen confidence by reassuring traders that dollars would remain available. Access to Federal Reserve swaps or repo facilities is often viewed as a signal of financial standing, potentially reducing the attraction of speculative pressure against a currency.

Securing international support can involve diplomatic negotiations and an assessment of underlying economic policy. The discussions reflect concern that domestic tools alone may struggle against financial forces operating across interconnected markets.

A Professor's Warning About Reserves

Kim Dae-jong, a professor of business administration at Sejong University, offered a more immediate warning about Korea's defenses against a foreign exchange crisis. In a recent interview, he put foreign exchange reserves at around 22% of gross domestic product, or GDP, and argued that this was inadequate.

GDP measures the value of goods and services produced in an economy. Comparing reserves with GDP gives a sense of the reserve buffer relative to the country's economic size. Foreign exchange reserves provide authorities with foreign currency assets that can be used when funding becomes difficult.

Kim placed the likelihood of a crisis near 30% without government preparation and called for larger reserves and currency swap safety nets:

Without government preparedness, the likelihood of a foreign exchange crisis approaches 30%. We must significantly increase foreign exchange reserves to Taiwan's level and establish safety nets through measures like Korea-Japan currency swaps.

Kim said Taiwan's reserves were equivalent to 80% of GDP, compared with Korea's 22%. Using those figures, Taiwan's reserve share is about 3.6 times Korea's. He presented that larger buffer as protection against speculative attacks.

The professor also said the won accounted for just 0.1% of international payments. He argued that its limited acceptance by international counterparties during a crisis would force Korea to rely heavily on dollars, potentially drawing down reserves quickly.

Kim assigned an 84% probability to an upward trend in the won per dollar exchange rate and forecast a level between 1,550 and 1,600 during 2026. A higher number in this quotation means a weaker won, because more won are needed to buy one dollar. His crisis probabilities and exchange rate forecast were his assessments.

Debt Concerns Extend Beyond the Headline Ratio

Kim argued that the interest cost of holding large foreign exchange reserves should be treated as an insurance expense. In his view, the financial cost of a currency crisis would be much greater than the earnings forgone by keeping a larger stock of liquid reserve assets.

His warning also covered public finances. The government highlights a debt ratio of 52% of GDP, but Kim called that figure an illusion. He argued that a broader measure including public enterprise debt and unfunded pension liabilities had already exceeded 130% of GDP.

Unfunded pension liabilities are future payment commitments for which enough money has not yet been set aside. Including those obligations and debt held by public enterprises produces a wider measure than the government's headline figure. Kim's argument was that these commitments should be included when judging the country's financial defenses.

Kim also cited a 60% debt threshold associated with IMF assessments of risk for countries whose currencies are not reserve currencies. South Korea was expected to cross that threshold by 2029. His concern linked rising debt with the limited international use of the won and the need to preserve confidence in public finances.

Taxes, Regulation and Money Moving Abroad

Kim connected currency pressure with conditions facing Korean businesses. He argued that high corporate taxes and strict regulation encouraged companies to move investment overseas, weakening the domestic tax base and adding to capital outflows.

He put Korea's corporate tax rate at 26%, against a global average of 21%, and said it was higher than rates in competing locations such as Singapore and Ireland. On those figures, Korea's rate exceeds the stated global average by five percentage points.

Kim also criticized Korea's approach to regulation, describing a system that specifies permitted activities rather than letting businesses operate unless something is prohibited. He argued that this restricted innovation and the creation of new businesses.

Ride sharing was his example. Kim said allowing platforms such as Uber could create more than 300,000 jobs. He linked restrictions on new industries to lost opportunities for employment and investment at home.

Companies moving abroad can leave the government with less tax revenue to service debt and finance social programs. Kim's argument was that this could lead to further tax increases or borrowing, adding pressure to investor confidence. For individuals, he recommended a defensive portfolio weighted heavily toward assets denominated in dollars, based on his expectation of a rising won per dollar exchange rate.

Korea's immediate problem is a weakening currency despite intervention, pension hedging arrangements and preparations for retail currency products. The IMF's broader warning concerns the market's capacity to handle the risks attached to a much larger stock of dollar assets. Kim's assessments add concerns about reserves, fiscal commitments and incentives for businesses to invest abroad.

The responses discussed range from changing domestic capital flows to obtaining international dollar support. Their shared purpose is to keep funding available and trading orderly when demand for currency protection rises suddenly.

The Essentials

• The IMF put Korea's dollar assets exposed to currency changes at nearly 25 times the size of its onshore foreign exchange market.
• Canada and Norway have similar ratios; Taiwan exceeds 45 times, Japan is around 15 times, and Germany, France and Spain have ratios in single digits.
• The won recently closed at 1,473.6 per dollar after losing gains following remarks by US Treasury Secretary Scott Bessent.
• Simultaneous hedging can strain banks and dollar funding markets, especially when international liquidity contracts.
• Korea extended the National Pension Service's hedging arrangement and is preparing retail products for selling currency forward.
• Bank of America called current measures insufficient; Citi suggested international coordination, possible swaps and access to the Federal Reserve's repo facility.
• Professor Kim Dae-jong put reserves at 22% of GDP, compared with Taiwan's 80%, and forecast 1,550 to 1,600 won per dollar during 2026.
• Kim also warned about broader public liabilities, corporate taxes and regulation, while Korea was expected to cross a debt ratio of 60% by 2029.