Currency swap to help minimize impact from $350 bil. US investment: analysts

Minister of Trade, Industry and Energy Kim Jung-kwan is surrounded by reporters as he arrives at Incheon International Airport, Sunday, after visiting the United States for tariff negotiations. Yonhap

Seoul is seeking to revive a currency swap deal with Washington to help break through stalled talks over its $350 billion investment into the U.S. as part of tariff negotiations.

Analysts say the bilateral deal could play the role of a safety net for Korea’s foreign exchange market in case the country needs to gather the large investment sum in a short period of time.

According to the Ministry of Finance and Economy and the presidential office, the government recently made a proposal to the U.S. for an “unlimited” currency swap.

The proposal comes amid a U.S. demand to increase the cash portion of the investment, as the allies have been wrangling over details of the controversial plan, which is part of the bilateral agreement reached in July, under which the U.S. agreed to set its blanket tariff imposed on Korean exports at 15 percent, down from 25 percent.

The U.S. demand has raised concerns from Seoul over a massive dollar outflow leading to a sharp weakening of the won.

Analysts said Monday that the currency swap proposal addresses two key concerns for Korea’s economy: maintaining a safety buffer for its $416.3 billion of foreign exchange reserves to ensure financial stability, and minimizing external shocks in the foreign exchange market to protect those reserves, especially as the exchange rate has remained unstable for the past few years.

“Under the circumstances, a new, third bilateral currency swap agreement is absolutely necessary to help stabilize the foreign exchange market,” said Shin Se-don, professor emeritus of economics at Sookmyung Women’s University.

The potential currency swap deal would be the third of its kind, following the first one from October 2008 to February 2010 to address the global financial crisis, and the second one from March 2020 to December 2021 to grapple with the COVID-19 pandemic.

As Shin explained, a currency swap can act as “a safety net in the event of volatile exchange rates and other financial risks,” as it allows Korea to deposit its own currency with the U.S. and borrow U.S. dollars at a predetermined exchange rate.

“The previous deals were in place during times when Korea’s foreign exchange market faced external risks, and we are facing similar risks now,” Shin said.

Inha University economics professor Shin Il-soon voiced a similar view.

“A new currency swap deal is crucial, considering that our foreign reserves fall short of securely raising the $350 billion investment demanded by the U.S.,” he said.

The professor pointed to Japan as an example, noting that its $1.3 trillion in reserves and existing currency swap deal with the U.S. put it in a stronger position than Korea to securely fund its promised $550 billion investment in the U.S.

“You can see that Korea is in a more urgent situation than Japan when it comes to managing currency rates and securing investment funds,” he said.

Kim Jin-wook, a Citi analyst, said, “Like during the global financial crisis, Korea will strongly seek an agreement between the Bank of Korea and the U.S. Federal Reserve, most likely an unlimited currency swap.”