Dollar share of FX reserves hits 5-year low in 2012

The weight of the U.S. dollar-denominated assets in South Korea's foreign exchange reserves fell to the lowest in five years in 2012 on its drive for investment in yuan assets and gold, the central bank said Friday.South Korea's foreign exchange reserves stood at US$326.97 billion as of the end of last year, the seventh-largest in the world. Out of the reserves, foreign currency-denominated assets reached $316.9 billion as of the end of 2012, the Bank of Korea (BOK) said in an annual policy report.The central bank's dollar holdings came to 57.3 percent of its foreign assets in 2012, down from 60.5 percent a year earlier.The 2012 reading marked the lowest level since 2007 when the central bank began to unveil related data. The weight of the dollar assets also declined below 60 percent for the first time last year."The weight of dollar assets fell as the BOK began to invest in yuan assets and increased gold holdings," Kang Sung-kyung, a director at the BOK's reserve management group, told reporters. "A weaker U.S. dollar raised the dollar conversion value of non-dollar assets."The BOK has made efforts to reduce the weight of its dollar assets in a bid to diversify the portfolio of the FX reserves. The portion of the BOK's 2012 dollar assets stayed below an average 61.8 percent held by global central banks as of end-September.Last year, the BOK earned qualified foreign institutional investor (QFII) status to invest in stocks and bonds in China within a $300 million quota. The bank also launched its investment in state and central bank bonds traded on China's over-the-counter market after receiving a quota of 20 billion yuan ($3.2 billion).As part of the diversification drive, the BOK bought 30 tons of gold in July and November. Since July 2011 when the bank purchased gold for the first time in 13 years, its total gold holdings rose to 104.4 tons valued at $4.79 billion as of end-February."The BOK did not invest in gold for price gains. We are buying gold to hold it almost permanently from long-term perspectives," Kang said when asked about the recent falling trend of gold prices.He also added that the Federal Reserve's potential cut of its bond-buying program may hurt investment returns for the BOK in the short term."But over the long haul, the investment returns are likely to turn better as yields of U.S. Treasuries will go up," Kang said.The report showed that the BOK raised the weight of government bonds and state agency bonds in its foreign assets in 2012 to seek safer assets amid unstable global financial markets, beset by the eurozone debt crisis.As of end-2012, 38 percent of the BOK's foreign assets were invested in government bonds, up 1.2 percentage points from the previous year, and 21.5 percent was parked in state agency bonds, up 1.4 percentage points from 2011.By asset allocations, the portion of investment tranches -- mostly state bonds -- accounted for 79.4 percent last year, down from 79.7 percent the previous year.But the weight of its external management tranche rose to 16.7 percent in 2012 from 15.8 percent in 2011 mainly because it entrusted part of its FX reserves to foreign and domestic asset managers for its yuan investment.