South Korea’s ability to navigate global market volatility is increasingly tied to the U.S. dollar, as the country’s exposure to dollar-denominated assets has grown far beyond the capacity of its foreign-exchange market to absorb sharp currency swings, according to the International Monetary Fund.
In its October 2025 Global Financial Stability Report, the IMF warned that South Korea’s unhedged dollar exposure now amounts to roughly 25 times the size of its foreign-exchange market—one of the largest mismatches among major economies. The imbalance, the fund said, leaves the country especially sensitive to abrupt moves in the dollar and shifts in global investor behavior.
The metric compares a nation’s monthly FX market turnover with its stock of dollar assets exposed to currency risk, offering a structural gauge of how effectively exchange-rate shocks can be absorbed. For South Korea, the gap has widened as institutional investors, exporters and retail investors have accumulated overseas dollar assets faster than domestic FX markets have deepened.
Among non–reserve-currency economies, South Korea stands out. While Japan holds a larger absolute stock of dollar assets, its deep and liquid FX market keeps exposure ratios below 20 times. Major European economies post single-digit ratios, benefiting from reserve or quasi-reserve currency status that cushions currency volatility.
The IMF cautioned that the risk is not merely theoretical. In a scenario where global investors rush to hedge currency exposure—selling dollar forward contracts simultaneously—countries with large dollar positions relative to FX market size could face amplified volatility. For South Korea, such a “rush to hedge” could quickly strain market liquidity and pressure the won.
Policy success, analysts say, will increasingly depend on how effectively Seoul manages this dollar sensitivity. The National Pension Service, one of the world’s largest institutional investors, has already expanded its strategic currency-hedging program, a move widely viewed as an effort to contain systemic risk tied to the dollar.
Attention is now turning to retail investors. A large share of South Koreans investing in U.S. equities remain unhedged, effectively making household portfolios an extension of the country’s dollar exposure. In periods of sharp dollar moves, losses or gains at the retail level could feed back into broader financial stability.
The government has begun to respond. The Ministry of Economy and Finance said it plans to introduce FX forward-selling products for individual investors through major securities firms. Under the structure, banks hedging these positions would need to sell dollars in the spot market, potentially increasing dollar supply and easing pressure on the won.
Whether such measures are sufficient may prove decisive. As global manufacturing, capital flows and monetary policy continue to realign around the dollar, South Korea’s economic outcomes—ranging from market stability to investor confidence—are increasingly shaped by how successfully it manages its exposure to the world’s dominant currency.
