Resumption of Korea-US Currency Swap: Will It Succeed This Time?

Ahead of Treasury Secretary Yellen's Visit to Korea on the 19th, Discussion on Currency Cooperation...Political Circles Urge Efforts for Agreement

[Image source=Yonhap News]

[Asia Economy Sejong=Reporters Haeyoung Kwon and Juyeon Oh] Ahead of U.S. Treasury Secretary Janet Yellen's visit to Korea on the 19th, discussions are underway to renew the Korea-U.S. currency swap agreement. Due to the 'strong dollar' causing the Korean won's value to decline and increasing concerns about capital outflows, the intention is to eliminate instability in the foreign exchange and financial markets through a currency swap between the two countries. Although the government is reportedly coordinating measures to strengthen currency cooperation as an agenda item for the Korea-U.S. Treasury Secretary meeting, the resumption of the currency swap depends entirely on the United States.

On the 13th, Kim Tae-nyeon, Chairman of the Democratic Party's Special Committee on Economic Crisis Response, urged the Ministry of Economy and Finance and the Bank of Korea to make efforts to establish a 'permanent currency swap' with the U.S. ahead of the meeting with Secretary Yellen. He said, "We need to properly inform that companies like Samsung and Hyundai Motor have invested in the U.S. to ensure the currency swap agreement is concluded," adding, "Deputy Prime Minister for Economy Choo Kyung-ho and Bank of Korea Governor Lee Chang-yong should also meet with U.S. congressional officials to help create a favorable atmosphere." The day before, Sung Il-jong, Chairman of the People Power Party's Policy Committee, also emphasized the necessity of resuming the currency swap, stating, "As the government is selling a lot of dollars it holds to defend the exchange rate, reducing foreign exchange reserves, the currency swap must be concluded."

A currency swap, which allows the exchange of currencies between two countries, is a kind of overdraft account. It is a pre-arranged contract to prepare for financial market instability, allowing funds to be drawn whenever needed, which can increase foreign exchange reserves. The Korea-U.S. currency swap was established during the 2008 global financial crisis and after the outbreak of COVID-19 in 2020 but was not extended and ended at the end of last year. It is reported that efforts to resume the Korea-U.S. currency swap were made at the presidential transition committee level after the inauguration of the Yoon Suk-yeol administration but were unsuccessful.

A Ministry of Economy and Finance official said, "The declaration from the Korea-U.S. summit in May included cooperation in the foreign exchange market, leaving room for the possibility of a currency swap," adding, "We are continuing discussions with the U.S. in that context." Another official from the ministry said, "Korea wants to resume the currency swap, but ultimately it depends on whether the U.S. accepts it."

With the won-dollar exchange rate hovering around 1,300 won, the need for a currency swap agreement has become greater than ever. However, since the U.S. has not established currency swaps with many countries and the counterparty is the U.S. Federal Reserve, it remains to be seen whether practical discussions can begin during Secretary Yellen's visit.