Bank of Korea FX reserves drop despite won strength By Investing.com

Investing.com -- Bank of Korea’s foreign exchange reserves fell by almost $10 billion in April despite the strong decline in the USD/KRW exchange rate. On Monday,Quality foreign exchange traders in 2020 Bank of America highlighted this inconsistent behavior in a research note.

The central bank’s FX reserves decreased by nearly $20 billion from January through April, even as the Korean won strengthened 3.2% against the U.S. dollar during this period. This pattern represents a departure from typical reserve movements, which usually increase when a currency strengthens.

During the same timeframe, the Bank of Korea’s long forward book position grew by $14 billion. Bank of America analysts suggest this increase may be connected to the use of the National Pension Service swap line, which neutralizes the NPS’s strong year-to-date U.S. dollar buying activity.

The decline in spot FX reserves during a time of U.S. dollar weakness could indicate the Bank of Korea is positioning for a stronger Korean won, according to the research note. This strategy may be particularly relevant as currency policy is currently a topic of discussion in ongoing trade negotiations with the United States.

The unusual movement in reserves comes as South Korea’s central bank navigates complex monetary policy decisions amid changing global economic conditions and trade relationships with major partners.

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