Choo downplays the need for swaps and sets up stability funds

An electronic display in a trading room at Hana Bank in central Seoul shows gains closed at 1,409.30 won as the market closed on Friday. [YONHAP]

The Treasury Secretary threw even more cold water at the idea of ​​Korea signing a currency swap agreement with the United States.

His comments came just two days after a major defeat in global markets that saw the won hit a fresh 13-year low and panic erupted.

“There is no cause for undue concern,” Finance Minister Choo Kyung-ho said on Ilyojindan, a weekly talk show on KBS.

The won is down about 18 percent since the start of the year, with its decline accelerating in recent weeks as the US Federal Reserve reiterated its hawkish stance and hiked interest rates by 75 basis points for a third straight month.

On Friday, the Korean won closed at 1,409.30 won and continued to decline in the futures markets as the wheels turned in London and New York.

With the Bank of Korea in a difficult position in terms of interest rates due to household debt and the volatile real estate market, the government is struggling to find ways to stabilize the foreign exchange market.

During Sunday’s KBS show, Choo outlined a plan for using a foreign exchange stabilization fund. Under the plan, the fund will support the issuance of futures contracts for exporters.

Due to the volatility in the financial markets, companies have had difficulty obtaining these contracts from financial institutions. Government intervention allows exporters to better hedge their risk and forecast future cash flows.

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, eliminating fears of dollar shortages and instilling confidence in the market.

The possibility of another contract was mentioned, but no concrete steps were taken. No agreement was reached during visits by President Joe Biden in May and Treasury Secretary Janet Yellen in July.

Signals have been mixed in recent weeks, with denials hinted at but never confirmed by officials. During President Yoon Suk-yeol’s visit to the United States from September 19-22, nothing was announced about a currency swap.

“A currency swap would definitely help stabilize our foreign exchange market, but international financial organizations believe Korea’s situation hasn’t reached the point yet,” Choo said. “Our position is very solid and not uncertain.”

Korea was the ninth-largest foreign exchange reserve holder at the end of July, and its net foreign assets stand at $740 billion, Choo said, adding that Korea and the United States have agreed to activate “various liquidity-providing measures” if necessary.

To stabilize the won, the Bank of Korea said on Friday it had agreed to open a dollar-for-won currency swap line with the state pension fund to ease demand for dollars in the domestic foreign exchange market.

The swap deal allows the National Pension Service to borrow foreign exchange reserves held by the central bank in exchange for its local currency holdings.

BY JIN MIN-JI [[email protected]]