Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol is seen engaging in trade discussions with U.S. Commerce Secretary Howard Ruthnick at the U.S. Department of Commerce in Washington, D.C., on the 29th (local time). (Photo provided by the Ministry of Economy and Finance)
As trade negotiations between South Korea and the United States proceed, it has been reported that the South Korean government has requested an unlimited currency swap agreement from the U.S. This is due to the potential for significant fluctuations in the foreign exchange market during the process of securing dollars for a $350 billion investment fund in the U.S.
According to the government and other sources, the South Korean government recently requested an unlimited currency swap agreement during trade negotiations with the U.S. A representative from the Ministry of Economy and Finance stated, “We are currently discussing various measures to minimize the impact on the foreign exchange market during the process of negotiating U.S. investments.”
A currency swap is an agreement between two countries to exchange money as needed at the current exchange rate and to re-exchange the principal at a pre-determined exchange rate after a certain period. It acts like an overdraft facility and helps stabilize financial markets during foreign currency liquidity crises.
If a currency swap between South Korea and the U.S. is established, the Bank of Korea would be able to borrow dollars from the U.S. Federal Reserve (Fed). Previously, South Korea and the U.S. entered into temporary currency swap agreements during the global financial crisis and the COVID-19 pandemic.
The South Korean government’s request for a perpetual currency swap stems from concerns that a short-term surge in dollar demand could lead to a weaker won and capital outflow. It serves as a safety measure against a steep rise in the won/dollar exchange rate. However, whether the U.S. will accept the proposal remains uncertain.
Earlier, on the 9th, Policy Chief Kim Yong-bum stated at a Korean Broadcasting Journalist Club symposium that “it is crucial for us to convey to the U.S. side the importance of how to source and manage $350 billion in the foreign exchange market upfront.”
He also mentioned, “It is difficult for us to secure more than $20 to $30 billion annually through the Export-Import Bank or the Industrial Bank of Korea,” and added, “We have asked for help from the U.S. to address the fundamental shock to the foreign exchange market.”
Meanwhile, as of the end of August, South Korea’s foreign exchange reserves stood at $416.3 billion, ranking 10th in the world.