US Fed Announces "Dollar Supply Secured by Treasury Bonds"... Bank of Korea to "Utilize Currency Swap for Now"

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] The U.S. central bank, the Federal Reserve (Fed), has introduced a plan to provide dollar liquidity to central banks around the world using U.S. Treasury securities as collateral, giving the Bank of Korea an additional method to supply dollars. Although Korea is not currently in a situation where it needs to borrow dollars using U.S. Treasury securities as collateral, the fact that it has secured insurance is viewed positively.

A Bank of Korea official stated on the 1st, "We do not believe that financial institutions are currently in a desperate situation rushing to obtain dollars," but added, "We plan to take measures in consideration of foreign currency funding conditions in the future."

However, the official added, "Since the Korea-U.S. currency swap agreement is currently in place, it is a better situation to utilize the dollar funds secured through the swap rather than using U.S. Treasury securities."

Currently, the Bank of Korea has a currency swap agreement with the Fed worth $60 billion. Although a competitive bidding was held using the first tranche of $12 billion from the swap funds the day before, the total bid amount was only $8.72 billion.

On the 31st (local time), the Fed announced in a statement, "We are establishing a temporary repurchase agreement facility (FIMA Repo Facility) to support the smooth functioning of financial markets, including the U.S. Treasury market." The repo facility is an institution that lends dollar cash by accepting U.S. Treasury securities held by central banks around the world as collateral.

As the COVID-19 pandemic spread, financial institutions and companies worldwide have been desperate to secure dollars, and the Fed stated that it can provide dollars if U.S. Treasury securities are offered as collateral. This helps stabilize the bond market because central banks do not have to sell off U.S. Treasury securities.

Market experts evaluated that the Fed's measure primarily targets emerging countries that do not have currency swap agreements.

Yumi Kim, a researcher at Kiwoom Securities, analyzed, "This measure appears to be aimed at buffering concerns about foreign exchange liquidity shortages in emerging countries, including the Middle East," adding, "Rather than changing the direction of currency values themselves, it will serve as a buffer to prevent sharp declines in emerging market currencies."

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