September 17, 2025
SEOUL – South Korea’s proposal for a bilateral currency swap with the US is unlikely to win Washington’s approval, economists here say.
The request comes as tariff negotiations between the two sides grow tense, with Washington pressing for more upfront cash for Seoul’s $350 billion investment pledge and Seoul seeking measures to contain financial risk.
Reports on Monday said Seoul proposed an “unlimited” swap arrangement, under which the Bank of Korea and the US Federal Reserve would exchange won and dollars at a predetermined rate, giving Seoul access to dollar liquidity in times of market stress.
The swap proposal is tied to Seoul’s July pledge to invest $350 billion in the US in exchange for cutting “reciprocal” tariffs on Korean exports to 15 percent from 25 percent. While the original understanding allowed for phased or fund-based contributions, US negotiators are now pressing for a larger cash share, raising concerns over heavy dollar outflows and strain on Korea’s currency market.
“The $350 billion sum is not far off Korea’s foreign-exchange reserves, so limiting market shock is crucial,” said Shinhan Bank economist Baik Seok-hyun. “With Washington trying to maximize the cash share, Seoul appears to be asking at least for a foreign exchange safety net.”
At more than 80 percent of Korea’s $410 billion in reserves, the pledge is a daunting sum that will inevitably add currency volatility, Baik said. “Even if the private sector funds part of it, the sheer size means the forex market will be affected.”
A large outflow risks driving the won lower, lifting import costs, fueling inflation and slowing the broader economy. Seoul argues that a swap line would serve as a backstop to stabilize markets and reassure investors.
Most analysts say the chances of US approval are slim, particularly for an unlimited arrangement.
“An unlimited swap is simply impossible unless you’re a reserve-currency country,” said Sookmyung University professor Shin Se-don. The US maintains standing swap lines only with reserve-currency economies such as Japan, the eurozone and the UK.
A veteran currency expert at the Korea Capital Market Institute was blunter: “The government likely pushed for an unlimited swap because temporary ones are tied to defined crisis periods. Since the risks from such massive funding are hard to pin down, they asked for unlimited liquidity — but that’s really unrealistic.”
A limited, time-bound swap could be more feasible, but it remains a high bar. “The past two cases were during clear crises. This time, the forex market isn’t in crisis yet, so it’s not really likely the US will accept,” said Yonsei University professor Kim Jeong-sik. “But it would still be worth the try.”
Korea and the US have struck two swap agreements, first during the 2008 global financial crisis and again in 2020 during the COVID-19 pandemic. In both cases, the announcement alone triggered a rapid rebound in the won and restored market confidence.
Economists say the swap proposal looks more like a bargaining chip than a policy likely to materialize, as the government works to finalize the July accord. The bigger question is how the $350 billion pledge will be financed, a decision that will ultimately determine the pressure on the currency market.
Professor Kim warned that the investment would move the market unless supported by safeguards. “If even part of the funding is raised domestically, dollar demand will rise and push the exchange rate higher, forcing authorities to sell reserves to stabilize the market,” he said.
The KCMI research fellow cautioned against focusing solely on reserves. “Korea’s net external assets total about $1.3 trillion, more than half held by the private sector. Looking only at reserves is misleading,” he said, adding that much of the pledge is tied to shipping and infrastructure projects, with a large share structured as loan guarantees rather than direct cash outflows.
Shin echoed that view, saying fears of a reserves drain are overstated. “Direct cash injection from reserves isn’t even in the government’s hands. It requires central bank cooperation, and most reserves are held in securities and bonds that would have to be sold first,” he said.
He added that the notion of “direct cash investment” needs a clearer definition. Past deals were about Korean companies building factories in the US, but $350 billion is far beyond what firms can commit, even with policy financing.
“Because the sum is too large to raise solely at home, it will likely be financed abroad, which would limit the impact on the won,” Shin said. “In that case, the strain on the domestic market would be minimal.”
jwc@heraldcorp.com