Dollar Hits Highest Level in 3 Years Despite US Fed Currency Swap Expansion

[Image source=AP Yonhap News]

[Asia Economy New York = Correspondent Baek Jong-min] The United States central bank, the Federal Reserve (Fed), announced on the 19th (local time) that it has signed currency swap agreements with nine central banks, including the Bank of Korea (BOK). Despite the Fed's measures, the value of the dollar rose again on the same day.

The Fed stated in a press release that it signed dollar swap agreements with nine central banks to ease tensions in the global dollar market and reduce the impact on credit supply to domestic and foreign households and businesses.

The counterparties are South Korea, Australia, Brazil, Mexico, Singapore, Sweden, Denmark, Norway, and New Zealand. Among them, the limits are $30 billion for Denmark, Norway, and New Zealand, and $60 billion for South Korea, Australia, Brazil, Mexico, Singapore, and Sweden. The duration is at least six months (until September 19, 2020).

A currency swap is an agreement that allows a country to deposit its own currency with the counterpart central bank and borrow the counterpart's currency when needed. The Fed signed currency swap agreements with 14 countries, including South Korea, during the 2008 global financial crisis. At that time, the currency swap size between South Korea and the United States was $30 billion.

This measure means that the Fed will directly supply abundant dollar liquidity to emerging markets experiencing dollar liquidity shortages due to the COVID-19 pandemic causing turmoil in financial markets, but the market reaction was different.

On the same day, the dollar index, which shows the value of the dollar against the six major currencies in the New York foreign exchange market, rose 1.6% from the previous day to 102.94, the highest in three years.

Oliver Allen, an economist at Capital Economics, predicted, "Although the Fed decided on additional currency swaps, it will be difficult to stop the dollar's strength with this level." He explained, "During the 2008 global financial crisis, dollar liquidity shortages also occurred, but the dollar value stabilized after the stock market recovered." He expects that the current dollar strength will continue unless the volatility in the global stock market is resolved.

This content was produced with the assistance of AI translation services.