Korea and Australia double their currency swapKorea and Australia have doubled their currency swap for another three years in hopes of lowering their dependency on the U.S. dollar.
The two countries have set their currency swap at 10 billion Australian dollars, which is roughly 8.7 trillion won or 7.6 billion U.S. dollars, up from 5 billion Australian dollars, the Korean Ministry of Strategy and Finance said Wednesday.
The currency swap with Australia is now Korea’s third largest after China and Indonesia.
“Both sides share the same view that uncertainties have become larger,” said Choi Ji-young, director of international finance at the Finance Ministry, referring to volatility in the global economy. “We agreed on increasing trade payments in each other’s currencies while lowering our dependency on the U.S. dollar.”
The Finance Ministry official also stressed that the Australian dollar is the world’s fifth-most traded currency.
The Korean government’s agreement with Australia follows similar moves made with other countries. Recently, it extended a currency swap with Malaysia worth $4.7 billion for another three years and is currently in negotiations with Indonesia to extend a $10 billion swap when it matures next month, though it has no plans to expand the amount.
There are jitters around the world that a major economic crisis on par with 2008 could spark in April, when the U.S. Treasury Department announces its foreign exchange report in which the department could label several major economies including China, Japan and Germany as currency manipulators.
Deutsche Bank in its letter to clients last week raised the possibility that the Donald Trump administration could declare China a currency manipulator and propose penalties for what the new president sees as unfair trade.
The Korean government is also sitting on nails. Last year, the country landed on a monitoring list by the U.S. Treasury Department along with four other economies – China, Japan, Germany and Taiwan. Under the Trade Facilitation and Trade Enforcement Act passed by Congress last February, trade partners that meet two out of three conditions - an annual trade surplus over $20 billion, a current account surplus exceeding 3 percent of GDP and continuous intervention in its foreign exchange market - go on the watch list.
The recent concerns have been strengthening the Korean won’s value against the dollar. Exporters are worried this may hamper a recent recovery in exports, as a stronger Korean won is usually bad for manufacturers.
The Korean government remains confident it can combat external risks with its substantial foreign reserve pool, which is the world’s eighth largest.
In January, the country’s foreign reserves posted $374 billion, nearly $3 billion more than the previous month. It was a turnaround from three straight months of sinking reserves, during which the government lost $6.6 billion.
Still, the Korea Economic Research Institute, a private think tank, says the country’s foreign reserves should be at $440 billion, based on Bank for International Settlements standards. Currency swaps will be vital in bolstering Korea’s defense against external risks.
There are growing concerns, though, that China might not extend its currency swap with Korea after it matures in October. China has the largest currency swap with Korea, at $56 billion. That’s roughly half of Korea’s $120 billion in currency swaps.
Last April, Korean Finance Minister Yoo Il-ho and People’s Bank of China CEO Zhou Xiaochuan agreed to extend the currency swap. But now, things are looking uncertain with geopolitical tension rising between the two countries. Over the summer, the Korean government agreed to deploy a U.S. missile defense system known as Thaad, drawing the ire of China.
The Chinese government has since discouraged travel to Korea and blocked imports of certain Korean products including cosmetics. The government, though, has not publicly admitted any connection between the restrictions and Thaad.
“Although the two governments have in principle agreed to extend the currency swap, because of political issues we cannot discount the possibility of failing to extend the swap,” Song In-chang, deputy minister of international affairs at the Finance Ministry, said during a press briefing last month.
Korea was also going to begin a currency swap with Japan, but that was postponed after diplomatic tension arose over the installation of a “comfort woman” statue outside the Japanese consulate in Busan last year. Japan is sensitive to statues commemorating women who were victims of sexual slavery by the Japanese military during World War II.
BY LEE HO-JEONG [firstname.lastname@example.org]