S. Korea's foreign currency deposits hit record high on weaker dollar

Foreign currency deposits in South Korea have swelled to a record high in November on the back of a weaker dollar, boosting local banks' holdings to $52.8 billion as of Nov. 19.

In addition to dollar deposits, banks' non-dollar holdings in yuan, euro and yen surged to 6.4 billion in yuan, 4.6 billion in euro and 471.4 billion in yen, marking their highest levels so far this year as of Nov. 17.

It is uncommon for deposits of major foreign currencies to surge simultaneously. Analysts attributed it to the Korean won's strength versus such currencies as investors rushed to buy foreign currencies at a bargain.

Dollar deposits, in particular, have risen significantly on heavy buying from short-term investors, with the dollar-won exchange rate slipping to more than two-and-a-half-year lows. Local exporters and importers are also hoarding the greenback amid signs of improving global transactions.

“There is a strong investor sentiment to bag dollars when they're cheap. Investors are also accumulating dollars in their currency portfolios to avert risk,” said a private banker.

The recovery in offshore trading activity during the second half of the year has also contributed to the increase in dollar deposits given considerable capital inflow into corporate accounts.

“Considering still-looming uncertainty, people want to hold on to the dollar instead of selling it,” said a financial industry official.

NON-DOLLAR DEPOSITS ALSO ON THE RISE

Holdings of non-dollar deposits such as the yuan, euro, and yen have also reached a yearly high as investors are diversifying their investments into major currencies against the weakening dollar.

Global banks expect the dollar to maintain its weakening bias in coming years, given that new US President Joe Biden is likely to roll out economic stimulus measures such as quantitative easing, which will further lower the dollar's value.

Growing anticipation for COVID-19 vaccines is also strengthening the market view that the dollar will further weaken. Once the global economy recovers, there will be an increased preference for risky assets, meaning increased capital flow into non-dollar assets.

Market watchers expect the Chinese yuan to perform bullish compared to the greenback.

“The dominating view is that there will be a huge rise in the value of emerging market currencies alongside the yuan,” said a local bank official. “The dollar may be the preferred currency for now, but there is a good chance that diversified investments will expand in the long term.”

Write to So-ram Jung and Hyun-ah Oh at ram@hankyung.com
Danbee Lee edited this article.