US-South Korea trade agreement stimulates demand for US dollars, South Korea significantly increases the limit for issuing foreign exchange stability bonds in 2026.

As South Korean authorities are preparing to deal with the surge in demand for US dollars resulting from a trade agreement with the United States, the country has more than doubled its annual foreign exchange stabilization bond issuance limit from the original plan. According to the annual budget plan approved by the South Korean National Assembly on Tuesday night, the foreign exchange stabilization bond issuance limit for 2026 has been significantly increased from the previous $1.4 billion to $5 billion, also higher than the $3.5 billion limit set for 2025. South Korean authorities use foreign exchange stabilization bonds to address exchange rate fluctuations and pressures from capital outflows. Previously, South Korea promised a $350 billion investment plan to the United States as part of the trade agreement, while the United States agreed to limit the outflow of dollars from South Korea to less than $20 billion annually. South Korean officials stated that the funds needed for the investment plan would be raised through the issuance of government-backed overseas bonds and income from foreign exchange reserve management. Last month, the ruling party in South Korea submitted a comprehensive special law aimed at implementing the investment plan, paving the way for the United States to reduce tariffs on South Korean cars to 15%. The legislation also calls for the establishment of a US-Korea Strategic Investment Fund, as well as a separate entity responsible for managing the fund for up to 20 years. In order to implement this investment plan, the South Korean government decided to boost foreign exchange reserves first, issuing samurai bonds and dollar-denominated bonds worth $1.7 billion in October. The South Korean authorities also issued euro-denominated bonds worth $1.4 billion in June, setting a record for the largest euro bond issuance in the country. The South Korean government previously stated that issuing the above bonds would help increase foreign exchange reserves and strengthen South Korea's sovereign debt credit rating. Currently, Moody's, S&P Global, and Fitch Ratings have ratings of Aa2, AA, and AA- respectively for South Korean sovereign debt. The exchange rate of the South Korean won against the US dollar has recently continued to decline, falling to its lowest level in sixteen years at one point. Since the second half of this year, the exchange rate of the South Korean won against the US dollar has dropped by more than 7%, making it the worst-performing Asian currency during the same period. The South Korean central bank attributed this to an increase in residents' overseas investments and foreign selling of domestic stocks last week. South Korean government officials expressed concerns about the increasing uncertainty in the foreign exchange market, stating that the continuing imbalance in residents' overseas investments may reinforce expectations of a weakening won, and unanimously agreed that it is necessary to actively use all available tools to address this. To cope with this rapidly changing situation in the foreign exchange market, various departments of the South Korean government held an emergency meeting on November 24 to discuss specific measures to stabilize the market. The meeting, reportedly led by the Ministry of Finance, was attended by the South Korean central bank, the Ministry of Health and Welfare, and the National Pension Service. The meeting focused on how to effectively alleviate the pressure of the depreciation of the South Korean won and evaluate possible intervention measures.