Rhee hems and haws on dollar swap as markets unravel

Korea's central bank continued to waffle on the issue of whether a currency swap with the United States is being pursued, even as the won collapsed and the financial markets in general were in turmoil.

An electronic display board at Hana Bank in central bank shows won breaking 1,430 won in intraday trading on Monday. [YONHAP]

Korea's central bank continued to waffle on the issue of whether a currency swap with the United States is being pursued, even as the won collapsed and the financial markets in general were in turmoil.

"The Bank of Korea has a very close relationship with the Fed — strong enough for it to be able to enter these discussions more so than any other central bankers," Gov. Rhee Chang-yong said Monday when asked whether the central bank and the presidential office have agreed to a currency swap.

As he spoke, the won traded above 1,430 to the dollar and Korean stocks were down about 3 percent. Korea's currency is down 20 percent from the beginning of the year.

For months, the possibility of a swap has been mentioned numerous times, though no clear statement has been made on whether Korea will be pursing one with the United States.

Korea had a currency swap with the United States from November 2008 and February 2010 and another from March 2020 to December 2021.

Under these arrangements, Korea is able to access dollars at a set rate over a given period of time from the Federal Reserve, ending fears about a dollar shortage and bringing confidence to the market.

The central bank is in a difficult position in terms of interest rates due to the indebtedness of households and the teetering property market. It cannot raise rates too quickly to help stabilize the currency, though Rhee did signal last week that rates could be increased faster than the previously anticipated 25 basis points at a time.

The government is also similarly constrained, as it has few levers at its disposal to stabilize the currency. Its main strategy so far has been verbal intervention, threats against speculators and discussions about a foreign exchange stabilization fund that would issue futures contracts to exporters.

The country has $740 billion total net foreign assets and is the ninth largest holder of foreign reserves as of the end of July.

"The depreciation gap of real effective exchange rate, which takes into account prices and trade proportions, does not diverge from the average level," Rhee said in a statement on the same day.

The Bank of Korea “will actively look for various microscopic countermeasures with the government to ease imbalanced supply and demand of foreign exchange, like the swap line with the state pension fund,” he also said.

To stabilize won, the Bank of Korea said Friday it has agreed to open a dollar-for-won currency swap line with the state pension fund to help meet the demand for dollars in the domestic foreign exchange market.

On Sunday, finance minister Choo Kyung-ho said international financial organizations do not think Korea's situation has reached the point to sign currency swap on Ilyojindan, a weekly talk show on KBS.

BY JIN MIN-JI [jin.minji@joongang.co.kr]