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The KB Kookmin Bank trading room in Seoul on Mar. 19, the day when the KOSPI index fell below 1500 and the Korean won fell in value against the US dollar to the lowest point since 2009.

On the evening of Mar. 19, the Bank of Korea (BOK) and the US Federal Reserve abruptly agreed to a currency swap. Negotiations between the two sides appear to have been sped up by a spike in the won/dollar exchange rate due to drying up dollar liquidity in the foreign exchange market.

At 10 pm on Thursday, the BOK and the Federal Reserve officially announced that they’d agreed to a currency swap worth US$60 billion. The BOK intends to immediately release US banknotes acquired through the swap. The swap agreement will be in place for at least six months (through Sept. 19).

A credit swap is akin to a credit line, under which the parties can withdraw each other’s banknotes for use at any time. The current arrangement allows South Korea and the US, when they deem necessary, to deposit their own currency in the other’s central bank and borrow a corresponding amount of the other country’s currency. This basically makes it easier for South Korea to acquire US banknotes. As the COVID-19 pandemic raises demand for the greenback and the won/dollar exchange rate hits its highest level in 10 years and eight months, this currency swap is expected to be a major boon in stabilizing South Korea’s foreign exchange, or forex, market.

“We’ve agreed to a currency swap with the goal of relieving the liquidity crunch in the global dollar-raising market, which has gotten worse recently. This will help stabilize South Korea’s forex market, which has seen the won/dollar exchange rate skyrocket because of the recent imbalance in supply and demand for the dollar,” the BOK said in a press release. The bank added that it will keep working with central banks in major countries to stabilize the financial market.

This is the second currency swap that South Korea and the US have arranged since a swap worth US$30 billion on Oct. 30, 2008. The 2008 swap was also rushed through amid growing concerns that the global financial crisis would create a dollar liquidity crisis in the domestic forex market. That swap was supposed to be only temporary, lasting for six months, until Apr. 30, 2009, but it was extended for another six months on Feb. 4, 2009 and then for three more months on June 26, terminating on Feb. 1, 2010. That currency swap relieved insecurity about dollar liquidity and helped restore stability to the soaring won/dollar exchange rate. The rate had risen from 1,089 at the end of August 2008 to 1,468 won at the time of the currency swap, but fell to 1,170 by the end of the swap.

Officially speaking, the South Korean government hasn’t yet said that the COVID-19 shock will escalate into a global financial crisis or that its forex reserves have fallen to a dangerous level. But since a currency swap can work wonders at calming insecurity in the market, Seoul had been seriously considering such a swap as one of several emergency measures that can be taken if the situation gets worse.

“A currency swap with the US would provide a sturdy safety net. The government is taking measures behind the scenes,” Deputy Prime Minister and Finance Minister Hong Nam-ki told the National Assembly on Mar. 17.

The American press has also spoken of the need of a currency swap with South Korea. “But to stave off the risk of dollar-funding markets seizing up, more help is needed for a broader range of countries,” a Wall Street Journal reporter wrote on Mar. 17. “The temporary swap lines instituted between the Fed and the central banks Brazil and Korea in 2008 could be restarted, and widened to include many other nations.”

The BOK has currently concluded currency swap arrangements worth more than US$193.2 billion altogether. Bilateral swaps are in place with eight countries: Canada (no advance limit), the US (US$60 billion), Switzerland (worth US$10.6 billion), China (worth US$56 billion), Australia (worth US$8.1 billion), Malaysia (worth US$4.7 billion), Indonesia (worth US$10 billion), and the UAE (worth US$5.4 billion). South Korea is also party to a US$38.4 billion multilateral currency swap arrangement called the Chiang Mai Initiative Multilateralization (CMIM), involving the ASEAN member states and three other countries, or 13 countries altogether.

From the perspective of South Korea, a currency swap with Japan could also help stabilize the market, but that’s not likely, given the current diplomatic dispute between the two countries. The two countries first concluded a currency swap in 2001, but that arrangement was ultimately terminated in 2015 when their bilateral relations soured because of Dokdo and other issues.

On the same day, the US Federal Reserve announced that it was concluding currency swap agreements with not only South Korea but also the central banks of Denmark, Norway, Sweden, Australia, New Zealand, Brazil, Mexico, and Singapore.

“The Federal Reserve has set up a program to exchange dollars for foreign currency with nine central banks to support dollar lending in global markets that are under pressure from the impact of the viral outbreak,” the Associated Press said on Wednesday, referring to the growing difficulty of acquiring dollars.

The swaps may help other countries make it easier for households and companies to buy dollars both at home and abroad. The AP said that the Federal Reserve had taken abrupt action to expand its credit swap agreements as people “rush to stockpile cash” amid the COVID-19 pandemic.

By Han Gwang-deok, finance correspondent, and Lee Kyung-mi and Cho Kye-wan, staff reporters

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