Bracing for a rate hike

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Bracing for a rate hike

Korea and Japan agreed to enter talks to resume a currency swap that ended in February in a meeting between finance ministers Yoo Il-ho and Taro Aso on Saturday. The exchange of foreign currencies enables partner countries to secure dollars and other currencies during a financial crisis. It can be a security tool for Korea, which had the traumatic experience of seeking an international bailout amid a currency and liquidity crisis in 1997.

Korea has swap agreements worth $119 billion with China, Indonesia, the United Arab Emirates, Malaysia and Australia. It also has stashed up $369.8 billion in foreign exchange reserves. With the total amount nearing $500 billion, Korea has sufficient ammunition against the next crisis.

Still, striking a currency swap with Japan is the right move to achieve balance in the swap portfolio. The swap with China is at $56 billion, or half of Korea’s foreign-currency deal balance. Too much reliance on a single economy can be risky. The emergency fund portfolio must be diversified to prepare for insecurity in the Chinese currency market.

A currency exchange deal also can set bilateral ties on favorable grounds. A pact with Japan will do more good than harm for Korea given the scale of the Japanese economy and the yen’s international rank. The previous deal was not extended beyond February because of diplomatic tensions between Korea and Japan over past issues.

The global financial front faces another rout after U.S. Federal Reserve Chair Janet Yellen hinted at a rate hike within the year saying the case for U.S. interest rates has strengthened. Once the U.S. begins snapping up the flood of liquidity it unleashed through expansive bond-purchase program from 2008, the local real estate and stock market could enter into turmoil. Authorities must do all they can to build up ammunition against another external crisis, including a swap agreement with Japan.

JoongAng Ilbo, Aug. 29, Page 30
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