Deputy Prime Minister and Finance Minister Lee Hyung-il emphasized that the Korea-U.S. currency swap is not due to a lack of foreign exchange liquidity, but rather a necessity for a safety net befitting South Korea’s economic stature.
Speaking at a press conference in Bangkok on October 16, Lee stated that the Korea-U.S. currency swap is significant and necessary to bolster the foreign exchange market’s safety net.
He clarified that this isn’t about addressing a foreign exchange shortage. It’s about establishing safeguards on par with advanced economies, given the economic growth.
Currency swaps allow countries to exchange currencies at predetermined rates, acting as a stabilizer during forex market turbulence by providing dollar liquidity. The Federal Reserve maintains permanent swap lines with central banks in Europe, Japan, the UK, Canada, and Switzerland. South Korea had temporary agreements with the U.S. – 30 billion USD during the 2008 financial crisis and 60 billion USD amid the COVID-19 pandemic in 2020.
Last year, Seoul requested a permanent swap line with Washington to mitigate potential forex shocks from U.S. investments.
Lee also underscored the importance of the inaugural 2+2 talks between U.S. and South Korean financial and monetary authorities.
While separate discussions between financial authorities and central banks are possible, joint talks carry more weight, Lee noted. This approach will prove invaluable if issues arise down the line.
Regarding the meeting’s arrangement, Lee revealed that it coordinated with the U.S. side about meeting in Bangkok well in advance. It finalized the announcement details late into the night due to necessary alignments.
On the meeting’s content, Lee was circumspect: Both parties agreed to keep discussions confidential. It can only say that it’s continuing the economic and financial cooperation talks. He added it was premature to confirm any follow-up four-party meetings.
Addressing recent exchange rate trends, Lee observed that when the won approached 1,550 KRW to the dollar (about 1.16 USD), it had diverged from economic fundamentals. It’s now seeing a correction towards those fundamentals.
He pledged close monitoring of forex markets, citing potential shifts in external conditions.
On tax revenue implications from exchange rate fluctuations, Lee explained that its corporate tax estimates factored in semiconductor firms’ performance and exchange rate effects. It doesn’t foresee a need to revise the revenue projections at this time.
Regarding inflation, Lee acknowledged ongoing price pressures due to the prolonged Middle East conflict. It’s keeping a close eye on global oil prices, a key inflation driver, and responding as needed, he concluded.