$60 Billion Korea-US Currency Swap 2nd Extension... "Until September Next Year" (Comprehensive)

Bank of Korea "Proactive Response to Uncertainty from COVID-19 Resurgence"
Two Extensions Also During 2008 Financial Crisis

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] The currency swap agreement between South Korea and the United States, valued at $60 billion (approximately 65 trillion KRW), has been extended for an additional six months. The Korea-US currency swap agreement, initially signed in March during the early spread of COVID-19, was scheduled to expire in September but was extended by six months, and this time it has been extended once more.

On the 16th (local US time, 17th Korean time), the Bank of Korea and the Ministry of Economy and Finance announced that the current currency swap agreement with the US Federal Reserve (Fed) will be extended for six months, moving the expiration date from March 31 next year to September 30.

In a press release, the Bank of Korea explained the background, stating, "Although risk appetite in international financial markets has recovered and the domestic foreign exchange market is generally stable, we agreed that extending the currency swap is necessary to proactively respond to uncertainties caused by the resurgence of COVID-19."

A currency swap is a foreign exchange transaction where two parties exchange different currencies at a pre-agreed exchange rate during a crisis when foreign currency is in short supply. It is often called a type of "foreign currency safety net" that allows borrowing the other country's currency when foreign currency runs out. The Fed also signed similar currency swap agreements with central banks of various countries, including South Korea, during the global financial crisis in 2008. At that time, the currency swaps were extended twice, each time for six months.

The Bank of Korea added, "We believe this maturity extension will contribute to maintaining stability in the domestic foreign exchange and financial markets, and if necessary, we plan to immediately utilize the currency swap funds."

When a dollar shortage appeared in the global market at the early spread of COVID-19, the Fed signed currency swap agreements on March 19 with nine central banks, including South Korea. This was a signal to sufficiently supply dollars to the global market to prevent instability. After signing the currency swap agreement, on March 29, the Bank of Korea announced a competitive bidding method for foreign currency loans using the currency swap funds and the schedule, supplying a total of $19.872 billion over six rounds starting March 31. As the foreign exchange sector stabilized, the full amount of the currency swap funds was repaid by July 30, and currently, there is no outstanding supply balance.

The Bank of Korea views that the currency swap agreement reduced exchange rate volatility and improved domestic foreign currency liquidity conditions, leading to rapid stabilization of the domestic foreign exchange sector. The won-dollar exchange rate, which surged to 1,285.7 KRW on March 19, fell to 1,217.4 KRW by the end of March after the currency swap was signed.

South Korea has signed currency swap agreements totaling more than $196.2 billion, including multilateral currency swaps with eight countries such as the US, China, and Switzerland, excluding Canada which has no pre-set limit. The Bank of Korea stated, "We plan to continue efforts to stabilize the financial and foreign exchange markets through close cooperation with major central banks, including the US Fed."

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