Korea, US get closer to currency swap deal after summit

President Yoon Suk-yeol and U.S. President Joe Biden hold a joint press conference following their first summit at the presidential office in Yongsan District in central Seoul, Saturday. Yonhap

By Yi Whan-woo

The latest summit between the leaders of Korea and the United States has raised expectations that the two allies will soon sign a currency swap agreement, since they agreed to cooperate closely to develop the foreign exchange market, according to experts, Monday.

Such expectations stem from growing calls for the revival of the currency swap deal here amid a rapid depreciation of the Korean won against the U.S. dollar that is feared to accelerate an exodus of foreign capital.

The currency swap deal enables Seoul to borrow dollars in exchange for the Korean currency at a pre-agreed rate. It thereby eases worries over a possible foreign currency crunch that can worsen Korea's path to an economic recovery by destabilizing the stock market, jack up import prices and fan additional inflation.

President Yoon Suk-yeol and U.S. President Joe Biden said in a joint statement issued after their summit that they "recognize the need to consult closely on foreign exchange market developments."

The statement says the purpose of such consultation is "to promote sustainable growth and financial stability, including orderly and well-functioning foreign exchange markets."

But the statement does not specify how the cooperation will be carried out in the foreign exchange market. Accordingly, it remains uncertain if talks will begin to resume a currency swap agreement that expired in December of 2021.

Nevertheless, the fact that a commitment to cooperation was addressed by the two heads of states "sends a strong signal that a currency swap or equivalent measures can be implemented if the dollar gets too strong for the market to withstand," said Park Chong-hoon, the head of economic research at Standard Chartered Bank Korea.

"The joint statement certainly can help reduce volatility on the foreign exchange market," he added.

Jeong Young-sik, a senior research fellow at the Korea Institute for International Economic Policy (KIEP), said the summit "opened the doors wide for the two allies to cooperate concerning a won-dollar exchange."

The researcher added, "In that regard, the summit can be said to contribute to market stabilization and such a contribution will get bigger as the form of cooperation becomes apparent."

Park said the joint commitment of Yoon and Biden to cooperate on the foreign exchange front will "have little impact" on curbing the won-dollar exchange rate from rising above the psychologically-important 1,300 won level. The won-dollar exchange rate, which stayed below 1,200 won in late February, closed at 1,264.1 won Monday, down 4 won from the previous close.

Asked about the timing of talks for a possible currency swap, Park said, "It may only begin when Korea's foreign currency reserves fall to a level that requires intervention from the central bank."

The country's foreign currency reserves are still considered "sufficient," although they shrank for two consecutive months and stood at $449.3 billion in April, down $8.51 billion from March, according to Bank of Korea (BOK) data in early May.

Some financial sources say the BOK under the Yoon government may opt for a standing bilateral currency swap with the U.S. Federal Reserve.

The Fed only has standing liquidity swap lines in place with the central banks of Canada, the European Union, Japan, Switzerland and the United Kingdom.

The method has no limit on liquidity provisions and no expiration date, unlike the previous Korea-U.S. deals that last for a limited time with a cap on the amount of borrowing,

Expired in December 2021 under the previous Moon Jae-in administration, the last currency swap contract was worth $60 billion.

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