Korea Needs Fresh Currency Swap Deal with U.S.

      September 19, 2022 13:46

      The U.S. Federal Reserve is expected to raise the key interest rate by a large margin again this week, raising fears that the Korean won will plummet even further against the U.S. dollar. The Korean currency has weakened to nearly W1,400. The government has been insisting that the dollar is rising against all other currencies, but since August the won has weakened 5.9 percent against the dollar while the euro fell only one percent, the pound 4.1 percent, the Canadian dollar 1.4 percent, the Australian dollar 1.3 percent and the Chinese yuan 2.7 percent.
      Currency speculators seem to believe that the Korean government and Bank of Korea, burdened by W1.8 quadrillion worth of household debt, cannot afford to hike interest rates to keep pace with the Fed, which will weaken the won further (US$1=W1,388). The government and BOK intervened several times to prop up the value of the won, tapping into Korea's foreign exchange reserves, but were unable to reverse the selling spree.
      Interest rates are expected to rise to four percent by the first half of next year and the won could weaken to W1,500 against the greenback if the trend continues. The last time the won fell to that level was during the 2008 global financial crisis. A weak won pushes up consumer prices while triggering an exodus of foreign capital.
      The government and BOK must come up with drastic measures to stem a further slide. One effective defense is a currency swap between Korea and the U.S. That agreement proved effective during the 2008 global financial crisis and the outbreak of the coronavirus pandemic in 2020. In fact, the won rose by W170 against the dollar a day after Seoul signed the deal in 2008. The chief presidential secretary for economic affairs said Friday that a currency swap will be discussed during a summit with the U.S. this week, and that statement alone arrested the sharp fall of the won, demonstrating the effectiveness of the deal.
      During their first summit in May of this year, President Yoon Suk-yeol and his U.S. counterpart Joe Biden agreed there is a "need for close cooperation in stabilizing foreign exchange markets." Yoon needs to remind Biden of that pledge in their upcoming meeting this week and forge a fresh currency swap deal.
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