Amid US inflationary pressures weighing on the global economy, the Korean financial market is also booming. As the Fed hints at further rate hikes, the Korean currency depreciates sharply. Foreigners withdraw their money from the Korean stock and bond market, fearing loss of exchange, which worries financial risks.

The won-dollar exchange rate has returned to the level of the 2009 financial crisis. An “interest rate reversal” between South Korea and the United States is expected, and the exchange rate is about to break through the 1,300 won range, the point at which investors may be psychologically shaken. With the decline in the value of the won, the sale of foreign investors in the domestic financial market in 2022 exceeded 15 trillion won. Foreign investment in the domestic bond market also fell sharply, dropping to one in seven in just three months.

Rapid US tightening measures are leading to currency depreciation not only in Korea, but also in Japan and China. However, the size of the Korean economy is relatively smaller and the Korean Won is less competitive in the global currency market, which is why there are fears of greater volatility in the foreign currency market. When the value of the won drops sharply, the prices of imported commodities, including oil and raw materials, will become more expensive, which could add more inflationary pressure.

It would be too anxious to worry about a currency crisis, but it is necessary to prepare a safety net in case the worst scenario occurs. Responding to US policy tightening with higher interest rates would not be effective enough on the brink of a long-term economic recession. South Korea is due to strike a currency swap deal with the United States at the upcoming South Korea-US summit.

A currency exchange allows Korea to borrow US dollars in exchange for an equivalent amount of Korean won. It’s like creating a negative passbook in the United States that prints dollars. A currency exchange, no matter how small, can effectively stabilize the forex market solely through its symbolic significance. In 2008, South Korea entered into a $30 billion currency swap deal with the United States and weathered the global financial crisis. In March 2020, when the COVID-19 pandemic broke out, the two countries entered into a currency swap agreement, which expired at the end of 2021.

The US has established permanent swap lines with only a few peers, such as the EU, UK and Japan, which have major currencies. It strikes a swap deal with other countries only on a fixed-term basis, and some critics believe that the likelihood of South Korea striking a deal with the United States is not so high. However, the KORUS alliance is expanding beyond the military alliance and evolving into a comprehensive economic and security alliance by cooperating on various initiatives including building a global semiconductor supply chain. We have to ask the United States for what we need. If South Korea agrees to a near-permanent currency swap agreement with the United States, the country’s financial market stability would be enhanced and the United States would also benefit from the agreement.