Bank of Korea denies imminent US swap deal as won falls


The Bank of Korea has denied that it will announce a currency swap arrangement with the US Federal Reserve this week, as the Korean won continues its slide against the dollar to the lowest levels since March 2009.

The won has fallen 15 per cent against the dollar since the beginning of the year, more than any other major currency in Asia apart from the yen. On Wednesday, the Korean currency was at Won1,394.9 to the dollar.

The east Asian country is struggling to defend its currency as the Fed sharply raises interest rates to curb inflation.

Despite the denial, expectations for a currency swap deal have grown after Choi Sang-mok, senior presidential secretary for economic affairs, said last week that both sides had taken an interest in reopening a currency swap line.

The Bank of Korea and the US Fed signed a $60bn currency swap pact in March 2020 as an emergency measure to stabilise foreign exchange markets, but the deal expired at the end of last year.

Analysts see such a deal, which would allow South Korea to borrow US dollars at a preset rate in exchange for won, as a last resort to stabilise the volatile market.

Bar chart of % change in US dollar price since January 2022 showing South Korea struggles to defend its currency against the surging greenback

Calls for a currency swap deal have intensified in recent weeks as analysts expect the dollar’s rally — near its highest level in more than two decades against major currencies — to continue at least until the end of the year.

“Authorities in South Korea and other Asian markets could be preparing for worst-case scenarios as the dollar is likely to continue to rise with the Fed’s rate hikes, but there is not much they can do to reverse the trend other than gradually raising their own interest rates to slow the pace,” said Hwang Se-woon, a researcher at Korea Capital Market Institute.

Export-dependent countries such as South Korea are under increasing pressure, with the country’s growing trade deficit and higher oil prices dimming the won’s outlook. South Korea reported a record trade deficit of $9.47bn in August.

Korean authorities have stepped up oversight of currency markets, with the Bank of Korea asking currency dealers to provide hourly reports on dollar demand after a series of verbal warnings failed to halt the won’s descent.

A South Korean panel that oversees the country’s massive National Pension Service, the world’s third-largest pension fund, plans to discuss improving its forex management rules on Friday.

“The government is trying hard to defend the psychologically important Won1,400 threshold, drawing a red line against it,” said Kim Seung-hyuk, a researcher at NH Futures. “Authorities are not just ramping up their rhetoric but also are actually intervening in the market, to slow the pace.”

The won is not the only victim of a surging dollar in Asia. The renminbi has breached the psychological level of Rmb7 against the dollar despite Beijing’s verbal warnings and other attempts to shore up the currency.



Read More: Bank of Korea denies imminent US swap deal as won falls

2022-09-20 22:14:38

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