How Currency Swap Deal with the U.S. Can Benefit Korea

      October 14, 2011 13:32

      Korea and the U.S. agreed to cooperate on currency stabilization. Although the agreement remains a verbal promise, there are hopeful signs of stability for the won, which has been yo-yoing alarmingly in recent weeks as a result of global uncertainties.

      When President Lee Myung-bak left for the U.S., nobody had high hopes of establishing a bilateral currency swap scheme. A source in the financial market said, "It seems that the U.S. brought up the issue as a gift to Korea after the Korea-U.S. free-trade agreement was ratified in the U.S. Congress."

      However, it is unlikely that a currency swap agreement will be signed any time soon as neither side feels a compelling need yet. One high-ranked official at the Ministry of Strategy and Finance said, "In principle, the U.S. operates currency swap schemes with those who use global currencies such as the eurozone, the U.K., and Switzerland. The U.S. does not strike these deals with emerging economies except in emergencies. Korea does not need a currency swap that much at the moment, so we did not put it on the agenda."

      Currency swapping is a double-edged sword. It gives Korea a strong and reliable backing from the U.S., and therefore can have a stabilizing effect on the Korean exchange market. But it can also trigger suspicions over Korea's financial situation as currency swapping may look like an emergency measure. Another official at the Ministry of Strategy and Finance said, "The reason why we have not openly talked about currency swapping is to avoid making the currency market more volatile."

      Even if a bilateral currency swap scheme is established, it is unlikely to be used as extensively as in the past. The Korean financial authority used US$41 billion during the first round of the swap scheme, which was inked in October 2008 and ran until February 2010. An official at the Ministry of Strategy and Finance said, "During the global financial crisis in 2008, we had foreign currency reserves of just over US$200 billion. But now, we have over US$300 billion and are getting a series of good reviews and a positive outlook for the Korean economy. Based on this, we won't be making use of the swap very often."

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