South Korea Pushes Won Bonds to Cut Reliance on Dollar Funding

South Korea is taking measures to curb reliance on dollar-denominated financing through the increase in the amount of won financing, the restructuring of the bond market and more foreign capital flowing into South Korea.

The strategy reflects a broader shift in how Asia’s fourth-largest economy manages external financing. For decades, South Korean companies and state-run institutions relied heavily on offshore dollar bond markets.

Seoul is now seeking to deepen domestic capital markets and increase the use of the won in trade and investment transactions while retaining access to international funding channels.

The government’s move coincides with a reassessment at several Asian economies of their dollar exposure as trade flows have shifted and the dollar’s role in foreign exchange reserves has been slowly decreasing.

Won Gains Ground in Trade Settlement

South Korea’s export settlement payments increased by 0.8 percentage point to a record 3.4 percent of the total export settlement in 2025, according to data from the Bank of Korea (BOK).

Bank of Korea data showed the U.S. dollar, euro, Japanese yen and Chinese yuan all lost share in South Korea’s export settlements in 2025, while the won was the only major settlement currency whose share increased.

On the import side, the won’s share rose to 6.6%, up 0.3 percentage points, supported by increased use of the Korean currency in trade with China and other markets.

The lower energy prices helped drive the change, the BOK said. In 2025, crude oil import prices in South Korea decreased 11.7% year on year to an average of $73.2 per barrel, which meant that the dollar value of imports was reduced. Trade settlement patterns were influenced by changes in U.S. tariff policies.

While the won still accounts for a small portion of total trade transactions, the data point to a gradual increase in the currency’s use in cross-border commerce.

WGBI Inclusion Draws Foreign Capital

A key part of Seoul’s strategy is expanding foreign participation in the domestic bond market.

In April 2026, the South Korean government bond was phased included in the FTSE Russell World Government Bond Index (WGBI). The process will be wrapped up in eight consecutive monthly phases up to November and involved years of market reforms such as tax exemptions for foreign investors, and the lifting of investment registration requirements.

Foreign investors net-purchased 8.1 trillion won ($5.5 billion) in Korean Treasury bonds in the weeks after inclusion began, according to local media reports citing government data. Foreign ownership of domestic government bonds rose to 25.0% from 24.6%, while the average maturity of holdings increased to 6.86 years from 6.56 years.

The Ministry of Economy and Finance (MOEF) of South Korea has estimated that foreign capital of around $56 billion could be drawn in in case the WGBI was fully included. The investment banks around the world have estimated inflows that range from $40 billion to $70 billion during the inclusion period.

The ministry said it would continue efforts to improve market infrastructure and support the development of what it described as an advanced treasury market following WGBI inclusion.

Seoul Maintains Access to Dollar Funding

The government raised the cap on foreign-currency bond issuances for 2026 to 3x the earlier amount of $1.4 billion to $5 billion. The rise will help curb exchange rate pressures stemming from external investment pledges and international financial environment, officials said.

The MOEF announced $3 billion in bonds under the Foreign Exchange Stabilization Fund in February, for a term of 3 to 5 years, with dollars as the currency. The MOEF announced in February the issuance of $3 billion in 3 and 5 year terms with dollar denomination, the country’s largest single dollar bond issue in 17 years.

The approach highlights Seoul’s balancing act, expanding the role of won-denominated assets while maintaining flexibility through established global funding markets.

Bank of Korea data showed the central bank continued to intervene in currency markets during 2025, including net dollar sales in the second and third quarters, reflecting persistent pressure on the won.

Broader Asia-Pacific Shift

South Korea’s approach aligns with that of its peers in the Asia-Pacific region, which are looking to build local capital markets and reduce dependence on foreign funding sources.

ING FX strategist Francesco Pesole said shifts in U.S. trade policy and periods of dollar weakness could encourage greater use of regional currencies. Analysts at Barclays have also noted that economies such as South Korea, Singapore, Taiwan, Hong Kong and China hold significant overseas assets, creating potential for more capital to flow back into local markets.

International Monetary Fund data show the dollar’s share of global foreign exchange reserves fell to 57.8% in 2024, down from more than 70% in 2000.

South Korea will issue 225.7 trillion won ($158 billion) in Treasuries in 2026, and has promised more changes to increase market liquidity and widen investor participation. Seoul is shifting its focus to local-currency markets in a larger role in its long-term funding plan as foreign investment grows and the won becomes more frequently used in trade and finance.