Rhee hems and haws on dollar swap as markets unravel

An electronic scoreboard at Hana Bank in the central bank shows gains of over 1,430 won in intraday trading on Monday. [YONHAP]

The Bank of Korea continued to ramble on about seeking a currency swap with the United States, even as the won plummeted and financial markets in general were in turmoil.

“The Bank of Korea has a very close relationship with the Fed — strong enough to be more involved in these discussions than any other central banker,” Gov. Rhee Chang-yong said Monday when asked if the central bank and the Presidential Office have approved a currency swap.

As he spoke, the won was trading above 1,430 against the dollar and Korean stocks were down about 3 percent. Korea’s currency has fallen 20 percent since the beginning of the year.

The possibility of a swap has been raised for months, although no clear statement has been made as to whether Korea is seeking one with the United States.

Korea had one currency swap with the United States from November 2008 and February 2010, and another from March 2020 to December 2021.

Under these agreements, Korea can access dollars from the Federal Reserve at a set rate for a period of time, ending fears of a dollar shortage and giving the market confidence.

The central bank is in a difficult interest rate situation due to household debt and the volatile real estate market. She cannot hike rates too quickly to help stabilize the currency, although Rhee signaled last week that rates could be hiked faster than the 25 basis points all at once previously expected.

The government is similarly constrained, with few leverages available to stabilize the currency. Their main strategy so far has been verbal intervention, threats against speculators and discussions about a foreign exchange stabilization fund that would issue futures contracts to exporters.

The country has total net external assets of $740 billion and is the ninth-largest foreign exchange reserve holder at the end of July.

“The real effective exchange rate depreciation gap, which takes into account prices and trade shares, does not deviate from the average level,” Rhee said in a statement the same day.

The Bank of Korea “will actively seek with the government various microeconomic countermeasures to reduce foreign exchange supply-demand imbalances, such as the swap line with the State Pension Fund,” he also said.

In a bid to stabilize won, the Bank of Korea announced on Friday that it has agreed to open a dollar-for-won currency swap line with the state pension fund to meet demand for dollars in the domestic foreign exchange market.

On Sunday, Finance Minister Choo Kyung-ho said international financial organizations don’t believe Korea’s situation has reached the point of signing a currency swap on Ilyojindan, a weekly talk show on KBS.

BY JIN MIN-JI [[email protected]]