U.S. and Korea hold fin min call to agree on liquidity facilities if FX instability worsens

[Photo by The Ministry of Economy and Finance]

Washington has confirmed to Seoul that it could supply liquidity support to South Korea and other key allies if financial instabilities from super-strong greenback worsen, according to the Korean Ministry of Finance and Economy Saturday.

“The two countries are ready to work closely together to implement liquidity facilities when necessary, such as when financial instability is aggravated by the spread of liquidity crunch in major economies including Korea,” the ministry said in a press release after Korean deputy prime minister Choo Kyung-hold held a conference call with U.S. Secretary of Treasury Janet Yelllen Friday evening in U.S. time.

Despite the sharp fall in the Korean won versus the U.S. dollar, Korea’s external fundamentals were strong with sufficient foreign exchange reserves, Yellen observed during the call made at her request.

The emergency conference call comes as the Korean markets have been rattled on panicky selloff following the U.S. Federal Reserve’s heads-up on bigger rate increases. Seoul has trotted out a flurry of actions to stabilize the currency, bond, and stock markets.

Forex intervention data released by the Bank of Korea on Friday showed transaction by Korean authorizes reached a net $15.49 billion in April-June period, nearly doubled from previous quarter high of $8.3 billion in the first quarter.

US Treasury Secretary Janet Yellen is seen with S. Korean Deputy PM and Minister of Economy and Finance Choo Kyung-ho meet in Seoul, on July 19, 2022. [Photo by The Ministry of Economy and Finance]

Korea does not specify details of forex transaction for market stabilization, but given the weakening in the won to the worst level since crisis times, it would have mostly sold the U.S. dollar to slow the depreciation in local currency.

FX reserve shrank $9.43 billion to $438.28 billion in June from May, the biggest dip since November 2008 amid Wall Street meltdown.

The dollar averaged at 1,259.6 won in the second quarter, compared with 1,204.9 won in the first quarter. Intervention spending would have grown in the third quarter as the dollar has jumped above 1,400 won in September. It closed Friday at 1,430.2 won.

Choo asked for stronger bilateral cooperation related to forex as the rapid tightening campaign by the U.S. and other major economies has been causing a toll on the Korean economy.

Choo also reiterated concerns for the U.S. Inflation Reduction Act stripping tax credits to Korean-made electric vehicles. Yellen in return suggested continued discussions on the issue, according to the statement.

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