Korea seeks unlimited U.S. currency swap; feasibility doubts
Korea’s push for an unlimited currency swap with the United States is likely to face significant hurdles, given the limited incentive for Washington to agree to the deal.
Korea proposed establishing an unlimited bilateral currency swap arrangement with the United States during recent trade talks, according to officials on Monday.
The proposal was made in response to Washington's demand that a greater share of Seoul’s $350 billion investment ? part of a deal to lower “reciprocal” tariffs on Korea from 25 percent to 15 percent ? be made in cash, a request that has sparked concerns over the impact on Seoul’s foreign exchange market following a mass exodus of dollars.
“Since the impact on the foreign exchange market is something we cannot ignore, we are approaching the negotiations with sufficient consideration of this issue,” said presidential spokesperson Kang Yu-jung in a press briefing on Monday.
The Finance Ministry said various measures are currently being discussed to minimize the impact on the foreign exchange market during negotiations with the United States, although it declined to provide further details.
“Signing the currency swap deal could bring significant benefits to Korea, as it would signal that the country’s foreign exchange market faces no liquidity concerns,” said Kim Han-soo, a senior research fellow at Korea Capital Market Institute, a local think tank. “But the deal is unlikely, especially since Korea has yet to open its foreign exchange market fully.”
While Korea has progressively liberalized its foreign exchange market over the years to encourage foreign investment, the government continues to monitor specific foreign currency flows to prevent speculative inflows and capital flight. This has hindered Korea’s upgrade to developed-market status in the Morgan Stanley Capital International (MSCI) index.
Kim added that it is premature to discuss the currency swap deal with the United States, given that the specifics of how the $350 billion investment will be executed have not yet been finalized. He also noted that there are alternative ways to facilitate large-scale investment without hurting the local currency market, such as issuing foreign currency bonds that would raise foreign currency from overseas investors.
“There’s no reason for the United States to agree to the currency swap arrangement, unless Korea offers something more,” said Seok Byung-hoon, an economics professor at Ewha Womans University. “Korea promised an investment that is too large for its economic size.”
Seoul and Washington have previously signed currency swap arrangements only twice, during the 2008 global financial crisis and the 2020 Covid-19 pandemic ? both times of economic struggles. The United States has established such agreements with several countries that use key currencies, including Japan, Britain and European nations.
Kim said the large-scale investment could be carried out in ways that minimize market shocks, such as by adjusting the investment timeline and diversifying funding channels.
"I don't think the $350 billion investment would significantly shake the foreign exchange market," Kim added. He noted that it may instead be Korea's strategy to gain something in return for such heavy investment, describing the currency swap as "one of the most fundamental and strategic benefits" that would reduce Korea's need to hold large amounts of foreign reserves.
Meanwhile, Industry Minister Kim Jung-kwan returned to Seoul on Sunday after holding separate trade talks with U.S. Commerce Secretary Howard Lutnick in Washington for detailed tariff negotiations.