Currency swap to have limited impact on economy: analysts

An electronic trading board at Hana Bank's headquarters in Seoul shows a surge in the won-dollar exchange rate on Thursday morning. The rate closed at 1,130.4 won per U.S. dollar, up 13.2 won from a day ago, reacting to the Federal Reserve's signal that tightening would occur earlier than expected. Yonhap

By Lee Min-hyung

The Bank of Korea (BOK) extended Thursday its currency swap deal, worth $60 billion (67.77 trillion won), with the United States Federal Reserve, for another three months until the end of 2021, a move to stabilize the financial and foreign exchange markets here, the BOK said.

“The BOK expects that this further extension of the swap arrangement with the Fed will contribute to sustaining the stability of financial markets, including the foreign exchange market, in Korea,” the central bank said in a statement. “The central bank will provide U.S. dollar loans to banks through competitive auctions, using funds from the swap line, when deemed necessary.”

Local economists say that the extension will have a limited impact on Korea's capital market, as the economy is not vulnerable to the possible U.S. dollar liquidity crisis for the time being.

“The extension will serve as a stabilizer in the case of an emergency, but the stock and capital market will pay little attention to the issue, as the economy is not in dire need of the U.S. dollar,” Korea Capital Market Institute economist Hwang Sei-woon said.

Despite the extension, the won-dollar exchange rate surged by 13.2 won and closed at 1,130.4 won against the greenback on Thursday.

The sharp depreciation of Korea's local currency has been attributable to the Fed's apparent hawkish shift during the two-day Federal Open Market Committee (FOMC) meeting, which ended Wednesday. The Fed sent a signal to push for possible interest rate hikes in 2023 amid growing inflationary fears, bringing forward the timeline of its earlier plan to maintain interest rates near zero until the end of the year.

“The Fed's signal for earlier-than-expected tightening appreciated the greenback against the Korean won,” Woori Bank economist Min Kyung-won said. “The hawkish turn of the Fed weakened sentiments for risky assets.”

Fed Chair Jerome Powell reaffirmed the Fed's position to keep purchasing bonds worth $120 billion each month for the country's post-pandemic economic recovery, but said that now is not the right time to start a discussion on tapering.

“The Fed appears to remain noncommittal over the possible tapering, in that uncertainties and risk factors surrounding the pandemic have not been completely removed,” Hi Investment & Securities analyst Park Sang-hyun said.

Regardless of the timeline of the possible tapering in the U.S., the BOK is on track to send a signal for its benchmark rate hikes to the capital market, in part to limit the expected impact from the Fed tilting toward a tightened monetary policy.

The BOK's monetary policy committee also recently updated its renewed stance as to the earlier rate hike during its latest meeting in May.

“The BOK's May meeting minutes clearly indicated that the overall committee stance has tilted hawkish,” JPMorgan analyst Park Seok-gil said. “The members broadly share the view that the outlook on GDP growth and inflation has been materially upgraded and the risk bias remains positive.”