'Korea-US currency swap resumption absolutely needed': experts
An employee fans dollar bills at Hana Bank's counterfeit response center in Seoul, Wednesday. Newsis
Incoming administration urged to secure currency-swap deal to stabilize market
By Anna J. Park
As the won-dollar exchange rate and interest rates both continue to soar, market experts are calling for the resumption of the Korea-U.S. currency swap. They view the currency swap deal is an 'absolute must' to stabilize the country's exchange rate, which has been nearing its 14-year high of about 1,300 won per dollar.
“It is absolutely necessary for Korea to resume its currency swap deal with the U.S. to stabilize the rising exchange rate,” Kim Dae-jong, a professor at Sejong University, told The Korea Times, adding that the Korean government should heed its utmost priority in stabilizing the foreign exchange market as well as maintaining the country's foreign reserves, in order to avoid a foreign exchange crisis as seen currently in other countries such as Sri Lanka, Pakistan and Argentina.
The professor explained that the currency swap deal had contributed to stabilizing the volatile foreign exchange market in Korea during the 2008 global financial crisis as well as the start of the pandemic in 2020.
In both cases, the won's depreciation against the dollar started to come under control in the market upon signing the deal with the U.S. The two countries signed a $60 billion currency swap contract in March 2020, which expired in December 2021.
“For now, Korea has neither a Korea-U.S. currency swap deal nor a Korea-Japan currency swap deal,” Kim said, stressing the need to secure the swap deals with major key currencies to reduce Korea's exposure to global risks.
Besides the won's continuous weakening trend, what is also worrisome is that the country's foreign exchange reserves have been on a steady decline, since the expiration of the currency swap deal between Korea and the U.S.
According to the Bank of Korea on Wednesday, Korea's foreign reserves stood at $449.3 billion as of the end of April, an 8.5 billion won fall from the previous month.
“Korea holds foreign reserves that account for only about 28 percent of the country's GDP level,” Kim stressed. “By contrast, countries like Taiwan hold foreign reserves worth over 90 percent of their GDP level. Hong Kong and Switzerland are also thoroughly prepared in their foreign reserves to protect themselves from any possible market risks.”
Given the U.S. Federal Reserve's planned move to raise its key interest rate further throughout the next couple of years, the won-dollar exchange rate is likely to continue its upward trend, he added, stressing the need to secure the currency swap deal with the U.S. and other key currency countries.
Reflecting such market views, the incoming Yoon administration is also examining whether the currency swap deal should be discussed at the Korea-U.S. summit slated for late May.
“As the Korean won is not a key currency, currency swap deals with key currency countries like the U.S. can help stabilize foreign exchange,” Choo Kyung-ho, nominee for finance minister, said at his Assembly hearing. He said that the position of the U.S. should be considered first before deciding to include it in the agenda.