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FX volatility still a concern over $350B U.S. investment despite safeguard measures

Published: 30 Oct. 2025, 18:34 Updated: 30 Oct. 2025, 19:10

JIN MIN-JI
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Korean presidential policy chief Kim Yong-beom speaks at a press briefing at the Asia-Pacific Economic Cooperation summit in Gyeongju, North Gyeongsang, on October 29. [YONHAP]

The market welcomed the Korea-U.S. agreement capping Seoul’s annual cash investment at $20 billion, a move that removes uncertainty over the foreign exchange market by finalizing the details of the $350 billion trade pact. But analysts warn the sheer scale of the commitment could still create foreign exchange fluctuations despite the safeguard plans.

The deal – reached during U.S. President Donald Trump’s visit to Korea for the Asia-Pacific Economic Cooperation summit – has been widely seen as a positive shift from the upfront payment Washington initially demanded, especially since it falls within the $20 billion annual investment the Bank of Korea (BOK) said could be made without disrupting the foreign exchange market. Still, questions remain over how Korea will annually finance an amount that represents roughly 5 percent of its foreign reserves as of September.

"The key question from the latest deal is how exactly Korea will finance the $20 billion, which remains unclear, rather than the fact that we reached an agreement on phased installments,” said Prof. Lee Yoon-soo, who teaches economics at Sogang University.

Kim Yong-beom, the presidential chief of staff for policy, said Wednesday that the amount can be mostly covered through earnings from managing Korea’s foreign exchange reserves, including interest and dividends.

But that would mean forgoing additional investment opportunities and limiting the accumulation of Korea’s foreign reserves at the expense of investing in the United States, Prof. Lee added.

Even as Kim promised that the government would source dollars through means other than market purchases to minimize the impact on the market, the won will stay largely unchanged since the large scale of net dollar outflows remains intact, according to Choi Ye-chan, an analyst at Sangsangin Investment & Securities.

“Based on data since 2010, an annual $10 billion change in the BOK’s foreign reserves is analyzed to move the dollar-won exchange rate by roughly 47 won on average. A reduction in foreign reserves could lead to lower sovereign credit ratings, higher credit default swap premiums and foreign capital flight, making it difficult to rule out indirect upward pressure on the exchange rate,” Choi added, keeping the 2026 average foreign exchange rate at 1,441.

Electronic display boards at Hana Bank in central Seoul show Korea's market on Oct. 30. [YONHAP]

Optimists on the trade deal focused on the reduction in uncertainty.

“The won had stayed weak over the past months, largely due to high uncertainty over how the details would unfold,” said Chang Min, a senior research fellow at the Korea Institute of Finance. “But now that the investment method has been confirmed, the foreign exchange market is expected to stabilize.”

Some say dollars can be raised without hurting the won’s value.

“Dollars raised from the issuance of foreign bonds abroad by the state-run Korea Export-Import Bank and Korea Development Bank can be directed straight to the United States, bypassing Korea and helping limit volatility in the won’s value in the local foreign exchange market, said Kim Han-soo, senior research fellow at the Korea Capital Market Institute. That is largely in line with Kim Yong-beom’s announcement on the possible ways Korea would source the fund.

He added that Korea’s currency swap proposal was an effective negotiating tool, noting that uncertainty over a potential agreement had weakened the won. The won was quoted at 1,426.5 against the greenback at 3:30 p.m. on Thursday as the details were declared final, down 0.36 percent from 1,431.7 the previous day.

“The United States would not want the won to stay weak, as it would give Korean exporters a competitive advantage by making their products cheaper in the United States,” Kim added.

The details of the Korea-U.S. investment had been deadlocked as they clashed on major issues, including how Seoul would finance the promised $350 billion. The two countries on Wednesday agreed to split the promised investment fund into $200 billion in cash to be paid in phased installments and the remaining $150 billion allocated to shipbuilding cooperation.

BY JIN MIN-JI [[email protected]]