Subscribe
E-Paper
By Anna J. Park
Local stocks and currency bounced back sharply Friday after a $60 billion currency swap deal agreement between Korea and the U.S. restored investor confidence by easing worries over a dollar shortage amid fears of a global recession.
The benchmark KOSPI ended its seven-day losing streak closing at 1,566.15, up 108.51 points or 7.44 percent from the previous day's trading. The secondary Kosdaq market finished with a bigger gain, jumping 9.2 percent to 467.75.
This was a dramatic turnaround from the Thursday collapse of both the KOSPI and Kosdaq which plunged 8.39 percent and 11.71 percent, respectively.
Individual and institutional investors led the rebound with net buying of 219.3 billion won ($175.8 million) and 149.6 billion won. However, foreign investors extended their selling spree for the 12th straight day, recording net selling of 426.6 billion won.
The local currency regained most of the ground it lost against the U.S. dollar a day ago, finishing at 1,246.5 won per dollar, up 39.2 won from Thursday when it lost 40 won.
The swift market turnaround came several hours after the Bank of Korea (BOK) announced it had agreed to sign a $60 billion currency swap deal with the U.S. Federal Reserve in a bid to relieve a dollar shortage triggered by a massive outflow of foreign capital amid the coronavirus pandemic.
The agreement, which will be effective through Sept. 19, was Korea's second bilateral currency deal with the U.S. The two countries signed their first swap deal for $30 billion in 2008, which lasted until February 2010.
BOK Governor Lee Ju-yeol told reporters early Friday that the bank will provide dollars to the market immediately once the specific agreement is signed. He also explained that the swap deal could be extended beyond six months, depending on the market situation.
"Due to the spread of COVID-19, the demand for dollars, a safe asset, has drastically surged, which created adverse effects on the domestic financial market, including a rise in the won-dollar exchange rate," Lee said, adding that the two countries' common need to stabilize the current volatility was the reason behind the swap deal.
 |
In a press release, the BOK vowed to continue cooperation with central banks in major countries for the stabilization of the financial market. Korea has so far signed bilateral currency swap deals with eight countries, including Canada, China and Australia.
Market observers say the swap deal is sending a very positive sign to the market, given the history of the previous deal in 2008.
"The before and after of the 2008 bilateral currency swap deal with the U.S. showed an extreme difference. Confidence in the financial market was restored again, just as Friday's stock and exchange market showed a drastic turnaround upon hearing the news of the swap arrangement," Nam Gil-nam, a senior research fellow at the Korea Capital Market Institute told The Korea Times.
"Often times, Korea's financial crisis is closely related to a fluctuation in the foreign exchange market That's why the swap deal could ease concerns over the dollar shortage," Nam added.
Han Dae-hoon, an analyst at SK Securities, also wrote in a research paper published Friday that the deal could function as a safety pin on the volatile market, as it lowered uncertainty.
"The currency swap deal alone cannot guarantee stabilization of the stock and foreign exchange markets. Fundamental policies that can resolve the core of the crisis should accompany the deal," Han wrote.
