Exchange Rate Nears 1400 Won... Will 'Currency Swap' Be Discussed at the Korea-US Summit?

Approximately 4 Months Since the Last South Korea-US Summit
Cooperation on Foreign Exchange Market Agreed at Previous Meeting
Exchange Rate Nears 1400 Won, Raising Concerns

President Yoon Suk-yeol is greeting U.S. President Joe Biden, who visited Korea for the South Korea-U.S. summit, at the Yongsan Presidential Office Building in Seoul on May 21. [Image source=Yonhap News]

As the won-dollar exchange rate rises to its highest level since the financial crisis, attention is focused on whether discussions on a currency swap between South Korea and the United States will take place during the upcoming South Korea-U.S. summit.

According to the financial market on the 17th, the won-dollar exchange rate closed at 1,388.0 won, down 5.7 won from the previous trading day. It opened at 1,399.0 won and was on the verge of breaking 1,400 won, but fell below 1,390 won due to the authorities' vigilance.

As concerns over the exchange rate grew, it is interpreted that the foreign exchange authorities increased market intervention. On the 15th, when the exchange rate hit a new high, the foreign exchange authorities verbally intervened, stating, "We are closely monitoring with caution the possibility of market concentration."

With expectations that the U.S. Federal Reserve (Fed) will implement an 'ultra step' (a 1 percentage point increase in the benchmark interest rate) at the Federal Open Market Committee (FOMC) regular meeting on the 20th-21st, the won is weakening further against the dollar.

Therefore, the market is paying close attention to the South Korea-U.S. summit next week, which will take place during President Yoon Suk-yeol's attendance at the United Nations General Assembly in New York. This summit is about four months after the last meeting between the two leaders in Seoul on May 21, following U.S. President Joe Biden's visit to South Korea.

At that time, the two leaders stated in a joint communiqu? that they "recognized the need to closely consult on foreign exchange market trends." This indicated an agreement on cooperation related to the foreign exchange market, raising some expectations that discussions on a South Korea-U.S. currency swap could gain momentum.

Although the currency swap discussions have not progressed since then, the recent intensification of the strong dollar and the sharp rise in the won-dollar exchange rate have renewed calls for the necessity of concluding a South Korea-U.S. currency swap.

A currency swap is a transaction where two countries exchange the necessary amount of money at a pre-agreed exchange rate and then re-exchange the principal at the originally agreed rate after a certain period. If a South Korea-U.S. currency swap is concluded, there is a high possibility that the exchange rate will stabilize.

Choi Sang-mok, the senior secretary for economic affairs at the presidential office, said at a briefing yesterday in response to a question about whether a currency swap might be discussed or concluded at the South Korea-U.S. summit, "It is something that can only be known when the leaders meet," but added, "Since it is a common interest, some natural discussions are expected."

Bank of Korea Governor Lee Chang-yong is explaining the base interest rate hike at a press briefing held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 25th of last month.
[Image source=Yonhap News]

However, the Bank of Korea and the government have shown somewhat passive attitudes despite the recent sharp rise in the exchange rate, raising doubts about whether the currency swap discussions will advance.

Bank of Korea Governor Lee Chang-yong said at a press conference following the Monetary Policy Committee regular meeting on the 25th of last month that the South Korea-U.S. currency swap "is not a means to prevent the rise of the won-dollar exchange rate," adding, "It can be a preparation for liquidity and credit risk, but it is a misunderstanding to think it can prevent the current situation where currencies worldwide are depreciating against the dollar."