Dollar-based Currency Swap

South Korea’s Strategy and Finance Minister Yoo Il-ho and his Japanese counterpart Taro Aso pose at a finance minister meeting in Seoul on August 27.
South Korea’s Strategy and Finance Minister Yoo Il-ho and his Japanese counterpart Taro Aso pose at a finance minister meeting in Seoul on August 27.

 

It is expected that South Korea and Japan will sign a U.S. dollar-based currency swap agreement in which South Korea gives the won to and receives the U.S. dollar from Japan in the case of a financial emergency on the part of South Korea and Japan gives the yen to and receives the U.S. dollar from South Korea during an emergency situation on the part of Japan. This is expected to play a positive role with uncertainties in the foreign exchange market mounting in the form of an interest rate hike by the Fed around the corner, Brexit, etc.

At present, South Korea has no U.S. dollar-based currency swap agreement in hand. Its agreement with China, worth 360 billion yuan, is based on yuan-won exchange. The U.S. dollar-based Chiang Mai Initiative, worth US$38.4 billion, requires the consent of multiple member countries and negotiations with the International Monetary Fund (IMF) for the fund to be actually used. Likewise, its agreement with Australia, worth AUD4.5 billion, is based on exchange between AUD and KRW.

“Details of the new currency swap agreement between South Korea and Japan cannot be made public yet because talks are underway now,” the South Korean government said. The two countries had a meeting in Seoul in late August this year and agreed to resume their currency swap, which expired in February this year after having reached as large as US$70 billion.

 

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