IMF Warns of Korea’s High Dollar Exposure Amid Retail Investment Boom

Traders at a Seoul bank dealing room monitor the stock index (KOSPI) and USD/KRW exchange rate. The IMF has cautioned that South Korea’s exposure to U.S. dollar assets is disproportionately large relative to its foreign exchange market, raising concerns about volatility.

Overview: IMF Sounds the Alarm on FX Risk

An IMF Global Financial Stability Report (GFSR) has issued an official warning that South Korea’s dollar-denominated assets exposed to exchange-rate risk are excessive relative to the size of its foreign exchange (FX) market . According to the IMF, Korea’s “FX-exposed dollar assets” amount to roughly 25 times the monthly trading volume of its FX market . This 25:1 ratio is among the highest of major economies surveyed – ranking Korea in the top five or six out of 20 countries . In essence, the Korean FX market’s “capacity” (monthly turnover) is dwarfed by the “load” of unhedged dollar assets that could be suddenly dumped or hedged, signaling a structural vulnerability in Korea’s ability to absorb external exchange-rate shocks .

International comparisons underscore the concern. Taiwan topped the list with about a 45:1 ratio of U.S. dollar asset exposure to FX market size . Korea’s ratio (25x) was similar to that of Canada and Norway, which also have large overseas investments relative to their market size  . By contrast, Japan’s dollar asset holdings are larger in absolute terms but its FX trading volume is so deep that Japan’s ratio falls below 20x . Major European economies (e.g. Germany, France, Italy) were even lower, in the single digits  . This starkly higher exposure in Korea and Taiwan – both non-reserve-currency countries – prompted the IMF to urge heightened vigilance in these cases . Unlike reserve-currency nations, countries like Korea lack ultra-deep FX markets and global safe-haven status, so an external shock to the dollar’s value could be absorbed more slowly and painfully in their markets .

Why an Overloaded FX Market is Risky

The key danger highlighted is a potential “rush to hedge” scenario . If the U.S. dollar’s exchange rate starts swinging sharply, investors holding large unhedged dollar assets (such as stocks or bonds abroad) may all scramble at once to hedge their currency risk. Typically, they would do so by selling dollars forward – i.e. entering contracts to sell USD in the future at a set rate, to lock in their won value. The IMF warns that in a shallow market like Korea’s, such simultaneous mass hedging could overwhelm the market’s depth, causing outsized volatility . Essentially, if many players try to unload or hedge dollars at the same time, the supply of dollars in the market would surge suddenly, and the won/dollar rate could move violently in a short period.

This kind of feedback loop can amplify instability. Korea’s FX market is not small by absolute terms, but relative to the nation’s overseas asset exposure it is thin – with fewer dealers and participants than reserve currency markets, and regulations historically designed to curb speculation. The IMF indicator of a 25x exposure suggests that Korea’s “breakwater” is much lower than the incoming tide of potential dollar trades in a stress scenario  . If a rush-to-hedge were triggered – for example, by signs of the won suddenly strengthening or weakening – the concentrated surge of forward dollar sales could dramatically swing the exchange rate in a self-perpetuating cycle. Korean authorities experienced similar pressure in past episodes: the Bank of Korea noted late last year that the won’s persistent weakness was partly driven by increasing overseas investments by residents, alongside foreign selling of Korean stocks . In other words, Korean individuals buying U.S. shares (and thus dollars) contributed to the won’s slide, and a reversal (everyone selling those dollars) could likewise jolt the market.

Retail Investors and the Dollar “Diet”

Underlying this situation is a dramatic boom in overseas investment by Korean retail investors – dubbed the “서학개미” phenomenon (literally “Western-learning ants,” referring to individuals investing in U.S. markets). In recent years, frustrated by a stagnant domestic stock market, Korean individuals poured money into U.S. stocks like NVIDIA, Tesla, and tech ETFs. By late 2024, Korean investors’ U.S. stock holdings surpassed $100 billion for the first time, an all-time high . (As of November 2024, about $101 billion or ₩142 trillion was held in U.S. equities by domestic investors .) This overseas investment fervor continued through 2025, pushing the total foreign stock holdings by Korean individuals even higher – Korean officials noted the figure exceeded $160 billion by Q3 2025 .

Crucially, most of these retail overseas investments were unhedged for currency risk. A typical individual buying U.S. stocks simply holds the dollar assets, implicitly betting that even if the won fluctuates, they can tolerate the risk or eventually cash out. During the won’s weakening trend in 2022–2025, this actually boosted the Korean won value of their U.S. stocks (a weaker won means their dollar stocks are worth more locally). However, it also meant Korea’s collective exposure to a dollar reversal was growing. If the U.S. dollar were to fall sharply (or the won strengthen), these investors would see their gains erode and might rush to hedge or exit – which, paradoxically, could accelerate the dollar’s decline (since hedging involves selling dollars). The IMF specifically pointed out that countries like Korea, where a large chunk of assets are unhedged, face the risk that “if dollar forward sales occur simultaneously, volatility could intensify” in the FX market .

The provocative question posed in Korean media – “Is the NVIDIA I bought shaking the exchange rate?” – captures this idea. One person’s stock trade is negligible, but collectively Korean retail investors have become a force large enough to move the needle on the currency. The Bank of Korea and regulators acknowledged this new reality: the finance ministry observed that past FX rules focused on stemming excessive inflows, and did not anticipate the sustained outflows from individual investors investing abroad . By late 2025, as the won neared historic lows (~₩1,500 per USD), authorities openly cited retail capital outflows as a factor weakening the won, even urging brokerages to halt aggressive marketing of overseas stock investments  . In short, Korea’s “dollar diet” – heavy consumption of dollar assets by everyone from pension funds to day traders – left its currency more vulnerable to swings.

Government and Institutional Responses

Facing these structural vulnerabilities, Korean authorities and institutions have begun taking steps to mitigate the risk. One major player, the National Pension Service (NPS), has started to hedge its foreign investments more actively, adopting what it calls “strategic currency hedging.” The NPS manages one of the world’s largest pension funds (over ₩900 trillion, with a large portion in overseas assets). In the past, NPS kept most foreign investments unhedged, but in late 2025 it shifted course to increase hedging flexibility  . A first vice minister explained that NPS moved away from a rigid hedging formula to a more dynamic approach, even creating “strategic ambiguity” so that hedging can be adjusted with market conditions . The intention is to reduce NPS’s impact on the domestic FX market – for instance, by sometimes raising investment funds offshore. (NPS officials noted they issued foreign-currency bonds to invest abroad, effectively using overseas capital instead of draining the local FX market for its investments .) This preemptive hedging by NPS is seen as an effort to shore up the “breakwater” before a storm hits .

The government, for its part, rolled out a plan to both stabilize the won and help individuals manage currency risk. In December 2025, the Ministry of Economy and Finance announced a “Tax Support Plan for Domestic Investment and FX Stability.” A core element is the introduction of “personal investor currency forward” products for retail investors . These are essentially forward contracts tailored for individuals, allowing them to sell U.S. dollars forward (i.e. agree now to exchange dollars for won at a future date) in order to hedge their overseas stocks. To incentivize uptake, the government is providing tax breaks for individuals who hedge their foreign stock holdings with these forward sales . Specifically, any retail investor who hedges the currency risk on overseas stocks (held as of Dec 23, 2025) through approved forward contracts will receive capital gains tax benefits . For example, up to ₩100 million of overseas holdings per person can be hedged with a 5% tax deduction on the hedging amount, capped at a ₩5 million tax deduction . This means if an investor buys a forward contract to hedge, say, $50,000 of U.S. stock, a portion of any eventual capital gains tax on those stocks would be forgiven. The measure effectively rewards investors for reducing their FX exposure.

From a policy perspective, this move aims to “kill two birds with one stone.” It gives individuals a tool to protect their assets from currency swings without liquidating their overseas stocks, and at the same time, if enough people participate, it would immediately increase the supply of dollars in the market (since forward-selling dollars now leads banks to supply dollars into the spot market) . That added dollar liquidity can help relieve upward pressure on the dollar/won rate (i.e. help strengthen the won or at least slow its decline) . In essence, each retail hedger is like a mini central banker adding to FX reserves: by locking in a future dollar sale, they encourage dollars to flow into the market today, which supports the won. The government also temporarily relaxed some FX regulations to boost market liquidity – for instance, it raised the limit on foreign currency forward positions for foreign bank branches (to encourage more dollar trading) and eased liquidity requirements so banks could lend or sell some of their dollar hoards  . Exporters were allowed more flexibility to take dollar loans (bringing dollars onshore) , and rules were adjusted to make it easier for foreign investors to buy Korean assets (attracting capital inflows) . At the same time, regulators leaned on brokerages to temporarily suspend marketing of overseas investments in hopes of stemming new outflows .

Criticisms and Concerns

While these measures demonstrate policymakers’ resolve, they have also drawn criticism from market observers and industry experts. Some analysts argue that the government’s approach is a “patchwork” solution that treats symptoms, not root causes . The flurry of incentives and rules came only after the won’s rapid slide and public outcry, suggesting a reactive stance. Critics note that Korea’s exchange rate stabilization measures have created confusion in the market . For example, the rollout of the new “Return-to-Domestic Investment” accounts (RIA) – which give tax breaks if investors sell foreign stocks and reinvest domestically – was rushed. Securities firms were told to implement RIA products by Q1 2026, but as of mid-January they had not received detailed guidelines on how to do so, leaving them scrambling . Brokerage officials privately complained that system development and compliance take time, and last-minute policy announcements left them unprepared . Meanwhile, individual investors faced inconsistent messaging – being urged to hedge or repatriate funds, while also seeing some of their perks (like fee waivers on overseas trades) withdrawn as officials pushed to tamp down outbound investment .

Another point of criticism is that the benefits of these policies may be unevenly distributed. The tax incentives for currency hedging and the RIA tax holiday largely favor those who already have substantial overseas assets – in other words, relatively wealthier investors. A commentary in the Seoul Economic Daily quipped that “rather than truly luring money back onshore, the policy may just be fattening the wallets of cash-rich overseas stock investors” . There is concern that savvy large investors can game the system – for instance, by selling stocks in an RIA account to get the tax break and then quietly buying back those overseas stocks in a different account, effectively getting a tax cut without committing long-term to Korean markets . Such “money shuffling” exploits would defeat the purpose of the policy, and officials have said they are reviewing measures to prevent it (like clawing back benefits if one re-invests abroad too quickly) . Nonetheless, completely closing those loopholes is difficult, and “eliminating side effects will be hard,” an industry insider admitted . In short, the exchange rate policies might end up rewarding those best positioned to utilize complex hedging products or move assets around, while the average small investor gains little.

Critics also argue that fundamental issues remain unaddressed. Korea’s high FX exposure stems from structural factors – the growing global diversification of Korean savings, the shallowness of the onshore FX market, and the won’s lesser status in international finance. These cannot be fixed overnight with tax tweaks. Some in the financial sector caution that authorities were caught flat-footed by the surge of retail capital outflows and the won’s slump, and are now rushing ad-hoc measures that may have limited effect . As one market executive noted, the won-dollar rate nearly hit 1,500 again even after intervention, saying “Before blaming the people investing in U.S. stocks for the weak won, the bigger problem is that we lacked a proper policy framework for a high-dollar scenario in the first place.”  This perspective suggests that South Korea needs a more comprehensive, forward-looking strategy for FX stability – such as further developing its FX market infrastructure, balancing capital flow management for both inflows and outflows, and perhaps cooperating internationally (e.g. swap lines or reserve arrangements) – rather than piecemeal fixes after pressures build.

Conclusion

South Korea’s run of “dollar fever” – from pension funds to retail investors heavily buying dollar assets – has prompted a wake-up call from the IMF. The warning is clear: an economy the size of Korea’s, without a reserve currency, runs risks when its citizens hold vast unhedged foreign assets that dwarf domestic market turnover. The Korean government has acknowledged these risks and responded with innovative tools like retail forward hedging products and tax incentives, alongside regulatory tweaks to boost dollar liquidity. These steps aim to fortify the country’s defenses against exchange-rate shocks and encourage a healthier balance in investment habits. However, the mixed reception shows the fine line policymakers must walk. Encouraging hedging and repatriation needs to be done without unduly penalizing investors or spooking markets. In the long run, South Korea may seek to deepen its FX markets (e.g. extending trading hours and participation ) and build a more resilient financial system so that the actions of a “NVIDIA-buying” retail army or a giant pension fund abroad do not so easily roil the home currency. The IMF’s cautionary message – essentially, “mind the gap” between external exposures and market buffers – will likely spur ongoing debate in Korea on how to best manage the country’s growing integration with global financial markets while safeguarding stability at home.

Sources:
• International Monetary Fund, Global Financial Stability Report (Oct 2025) – analysis of FX market vulnerabilities  
• Seoul Economic Daily, Jan 18, 2026 – “IMF: Korea’s FX-Exposed Dollar Assets 25 Times Larger Than FX Market”  
• EToday via Daum News, Jan 18, 2026 – coverage of IMF warning on Korea’s FX exposure (in Korean)  
• Reuters, Dec 1, 2025 – “S. Korea watchdog wary of FX risks for retail investors” (won weakness linked to overseas investment) 
• Maeil Business News, Nov 10, 2024 – “ 서학개미 U.S. stock accounts hit $100 billion” (Korean retail overseas investment milestones) 
• YTN News, Dec 24, 2025 – “Gov’t announces tax incentives, retail forward FX product” 
• Seoul Economic Daily (English), Dec 24, 2025 – “Korea to Allow Retail Investors to Hedge FX Risk with Forwards”  
• Korea JoongAng Daily, Dec 18, 2025 – “Gov’t relaxes forex rules to boost dollar supply”  
• Seoul Economic Daily (English), Jan 16, 2026 – “[Dongsipjagak] Exchange rate policy benefits only cash-rich investors” (Commentary on policy drawbacks)  
• Seoul Economic Daily (English), Jan 16, 2026 – “NPS hedging strategy now flexible” (Official interview on pension fund hedging)