Insights 
VT 
South Korea’s foreign exchange reserves experienced a decline of nearly $5 billion in April, reaching $404.67 billion. This marked the lowest reserve level since April 2020, as measures were undertaken to stabilise currency markets amid ongoing trade tensions.
The Bank of Korea identified FX swap operations with the national pension fund as a primary reason for the reserves’ reduction. These operations were intended to address and alleviate the demand for dollars in the market.
Korean Won’s Recovery
During this period, the Korean won saw a recovery, gaining 3.3% in April. This rebound followed a temporary fall to a 16-year low, influenced by new U.S. tariff policies.
Given recent interventions by the Bank of Korea, what we’re observing is a deliberate and somewhat expected shift in reserve positioning. Relying on FX swap agreements with the national pension fund isn’t just an indirect method of injecting dollar liquidity—it’s a clear signal that adjustments in policy tools are being deployed to moderate abrupt currency moves without tapping heavily into outright sales of foreign assets.
FX reserves dipping to levels not seen since the early stages of the pandemic might feel uncomfortable, but framing this within the scope of temporary liquidity management paints a different picture. Such tools aren’t typically used unless short-term funding stress in the dollar market justifies them. That stress, at least over recent weeks, was prompted largely by dollar strength globally, combined with narrowed capital inflows. The context provided by the pension-related swaps shows an intention to balance that divergence without amplifying market volatility.
Lee’s institution is effectively signalling that it remains responsive without being reactive. While some might see health in the won’s 3.3% rebound, there’s little in recent price action to suggest it was entirely organic. The recovery, following a drop to multi-year lows, stemmed as much from tactical market stabilisation as from broader macro improvements. More specifically, that bounce took place amid changes in U.S. trade policy which temporarily shifted capital positioning back to Asia.
Focus On Swap Interventions
Given this backdrop, we find it more prudent to price in two key conditions: first, continued pressure on reserves may still appear in May’s figures unless the pension swap line is restructured or allowed to expire; second, won-based assets could remain prone to sharp directional moves if trade policy clarity doesn’t materialise. The absence of aggressive dollar selling from the Bank of Korea, replaced instead by swap interventions, hints that the authorities are closely tracking foreign appetite and hedging mismatches rather than purely exchange rate targets.
Traders assessing near-dated positioning would do well to monitor the maturity profile and scale of these swaps, less for their absolute impact and more for their timing. If rollovers or adjustments occur before major U.S. policy updates or external debt settlements, intraday rate gaps could widen, even if short-term vol stays compressed. Park’s approach, rooted in preserving optionality, reflects a broader strategic preference for keeping real money investors steady while keeping speculative capital in check.
Given the timing of this action—right around the peak of cross-border funding demand in April—we’ve flagged cross-currency basis moves as a leading signal of potential interventions. Observing smaller adjustments in those levels moving forward might confirm that the worst of short-term stress has passed, though this doesn’t allay deeper concerns tied to trade dependencies.
Ultimately, attention in the coming sessions would be best placed not on the spot level, but on the forward curves and swap differential shifts, which now more accurately reflect demand for hedging versus directional views. As participants, this is where our focus should remain.
