Financial institution of Korea denies imminent US forex swap deal

The Financial institution of Korea has denied that it’s going to announce a forex swap association with the US Federal Reserve this week, because the Korean received continues its slide in opposition to the greenback to the bottom ranges since March 2009.

The received has fallen 15 per cent in opposition to the greenback because the starting of the yr, greater than another main forex in Asia other than the yen. On Wednesday, the Korean forex was at Won1,394.9 to the greenback.

The east Asian nation is struggling to defend its forex because the Fed sharply raises rates of interest to curb inflation.

Regardless of the denial, expectations for a forex swap deal have grown after Choi Sang-mok, senior presidential secretary for financial affairs, mentioned final week that each side had taken an curiosity in reopening a forex swap line.

The Financial institution of Korea and the US Fed signed a $60bn forex swap pact in March 2020 as an emergency measure to stabilise international trade markets, however the deal expired on the finish of final yr.

Analysts see such a deal, which might permit South Korea to borrow US {dollars} at a preset fee in trade for received, as a final resort to stabilise the risky market.

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

Requires a forex swap deal have intensified in latest weeks as analysts count on the greenback’s rally — close to its highest degree in additional than twenty years in opposition to main currencies — to proceed not less than till the tip of the yr.

“Authorities in South Korea and different Asian markets might be making ready for worst-case situations because the greenback is more likely to proceed to rise with the Fed’s fee hikes, however there’s not a lot they will do to reverse the pattern aside from progressively elevating their very own rates of interest to sluggish the tempo,” mentioned Hwang Se-woon, a researcher at Korea Capital Market Institute.

Export-dependent international locations similar to South Korea are underneath rising stress, with the nation’s rising commerce deficit and better oil costs dimming the received’s outlook. South Korea reported a document commerce deficit of $9.47bn in August.

Korean authorities have stepped up oversight of forex markets, with the Financial institution of Korea asking forex sellers to supply hourly reviews on greenback demand after a sequence of verbal warnings did not halt the received’s descent.

A South Korean panel that oversees the nation’s large Nationwide Pension Service, the world’s third-largest pension fund, plans to debate bettering its foreign exchange administration guidelines on Friday.

“The federal government is making an attempt onerous to defend the psychologically essential Won1,400 threshold, drawing a crimson line in opposition to it,” mentioned Kim Seung-hyuk, a researcher at NH Futures. “Authorities usually are not simply ramping up their rhetoric but in addition are literally intervening out there, to sluggish the tempo.”

The received is just not the one sufferer of a surging greenback in Asia. The renminbi has breached the psychological degree of Rmb7 in opposition to the greenback regardless of Beijing’s verbal warnings and different makes an attempt to shore up the forex.