Seoul under pressure to seek currency swap with US as KRW nears 13-yr lows

[Photo by MK DB]

As the U.S. dollar nears 1,300 won level last suffered in the wake of financial crisis, Seoul authorities are under increasing pressure to seek currency swap agreement with the United States timed with President Joe Biden’s visit to Seoul, while fearing sending more negative signal about the Korean economy from the move usually taken during times of crisis.

The greenback added 3.6 won to 1,274.1 won after 25-month highest closing on Friday. The Korean won has revisited to the lows of the early outbreak of Covid-19 in Korea in March 2020. The threshold of 1,300 won was last breached on July 14, 2009.

The U.S. dollar gained more strength after the U.S. rates were yanked up by 50 basis points.

Won’s fast weakening can add more inflationary pressure to import-reliant Korea and slow spending as well as weakening appeal in Korean assets, which has upped the rationale for currency swap with greenback as security.

Sung Il-jong, policy head of the People Power Party which becomes the ruling party after Yoon Suk-yeol is sworn in as the president on Tuesday, said the two summits should discuss currency swap on their first meeting on May 21.

A currency swap is an agreement in which two countries exchange money based on spot rate and after a certain period of time is re-exchanged at a rate fixed upon initial contract. A cross-country swap with the United States means that Korea is able to freely seek U.S. dollars, which in real economy world fundamentally removes possibility of foreign exchange crisis.

The U.S. central bank usually entered currency swap agreement with South Korea in a bundle with other allies during times of crisis.

It is in permanent agreement only with internationally-trading currencies like euro, yen, and British pound.

Rhee Chang-yong, the new Bank of Korea Governor, told lawmakers during confirmation hearing last month was doubtful of entering a swap agreement.

“We cannot strike a deal because we want to,” he said.

The swap was signed during the 2008 financial crisis and early phase of Covid-19 in March 2020.

In 2008, the measure came on Korea’s request while in 2020 the U.S. took a preemptive measure on 9 countries that included Korea.

Although the swap agreement can add to security, the move can send a wrong message to foreign investors, some worry.

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