The International Monetary Fund issued a pointed warning in its January 2026 Article IV consultation report on South Korea, highlighting significant exchange-rate risk stemming from the country’s heavy concentration of dollar-denominated assets. With foreign exchange reserves exceeding $430 billion over 90% held in US dollars or dollar-linked instruments the IMF cautioned that a sharp depreciation of the won or sudden shifts in US monetary policy could inflict substantial capital losses and strain financial stability.
The report notes that Korea’s reserve composition remains one of the most dollar-heavy among major economies, leaving it vulnerable to dollar strength, US rate hikes, or geopolitical shocks that disrupt Treasury markets. While acknowledging the dollar’s continued role as the dominant reserve currency, the IMF urged gradual diversification into other currencies and higher-yielding safe assets to mitigate tail risks without sacrificing liquidity.
Bank of Korea officials pushed back, arguing that the dollar’s liquidity, depth, and stability continue to make it the optimal choice for a trade-dependent economy like Korea’s. They stressed active currency-hedging strategies, macroprudential tools, and a flexible exchange-rate regime as sufficient safeguards against volatility.
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