As the won-dollar exchange rate has risen rapidly recently, calls are growing to sign currency swaps with reserve currency countries such as the United States as a "foreign-exchange breakwater." A currency swap is a contract in which Korea deposits won with the counterparty and borrows the counterparty's currency at a pre-agreed exchange rate. It serves as a breakwater to prevent market shocks when Korea lacks foreign currency.
Korea temporarily signed currency swaps with the United States in 2008 and 2020, and the contract ended four years ago. It was reported that during Korea-U.S. investment talks, the Korean government proposed an unlimited currency swap to the United States, but it did not materialize.
Currently, Korea has currency swaps with Switzerland and Japan, but the agreements with both countries are set to mature in Mar. and Nov. next year. Experts noted, "Currency swaps with key countries are meaningful regardless of size," and "There is a need to secure currency swaps in preparation for contingencies."
◇ Japan has an "unlimited currency swap" with the United States... Korea also pushed for it but it fell through
The United States, which can print the world's No. 1 reserve currency, the dollar, is a country with which all nations want to sign currency swaps.
Korea signed two temporary currency swaps with the United States in 2008 and 2020, for $30 billion and $60 billion, respectively. At the time, to ease global financial market instability, the United States signed a series of temporary currency swaps with emerging economies, including Korea. The contract with Korea ended at the end of 2021 and has not been renewed since.
It was reported that during negotiations for a $350 billion investment fund, the current government proposed an unlimited currency swap to the U.S. side. However, the Korea-U.S. investment agreement did not include a currency swap. Wi Sung-lac, Office of National Security chief, said at a press briefing on Oct. 10, "We proposed an unlimited currency swap to the U.S. Treasury, but there has been no progress."
By contrast, the United States removed the "cap" on its currency swap with Japan in 2008 and has maintained that. The United States also has such unlimited currency swaps with the EU, Switzerland, the United Kingdom, and Canada. All are current reserve currency issuers or countries that previously held reserve currencies. Because these countries' currencies are used the most in international settlements after the dollar, their collateral value is high. In addition, Japan and others hold many dollar-denominated assets such as U.S. Government Bonds, so from the U.S. standpoint there is a need to supply dollars.
The prevailing view is that Korea ranks low on the U.S. priority list for concluding an unlimited currency swap anytime soon. Some also see the possibility that the Trump administration could use an unlimited currency swap as leverage to demand larger investments from the Korean government. Kim Jeong-sik, an economics professor at Yonsei University, said, "Because President Trump is very skilled at the art of the deal, even if a Korea-U.S. currency swap is signed, he could demand quid pro quo measures such as opening the agricultural market."
◇ Japan and Switzerland currency swaps also mature next year... "Need to resume currency swaps with the United States and others"
Korea currently has temporary currency swaps with reserve currency countries Japan and Switzerland. Both mature next year. If both agreements end, Korea will have no currency swaps with reserve currency countries. Korea has an unlimited currency swap with Canada, a quasi-reserve currency country.
An official in the foreign exchange market said, "The possibility of extending both agreements remains open, but because currency swaps hinge on the counterparty's policy judgment, the outcome cannot be guaranteed."
Experts say that in the mid to long term, the Korea-U.S. currency swap should be resumed. Park Sang-hyun, a researcher at iM Securities, said, "The mere existence of a currency swap, more than its size, has a large psychological stabilizing effect on the market," adding, "If it is not extended, it could act as a short-term negative in a high exchange rate phase." Professor Kim Jeong-sik said, "Even if it is not needed immediately, there is a need to prepare a currency swap in advance in case market instability expands, such as the exchange rate exceeding 1,500 won."
Meanwhile, a Bank of Korea (BOK) official said, "We cannot confirm whether there are talks to renew the currency swap."