Yoon, Biden should discuss ways of stabilizing Korean won
South Korea and the United States are seeking to discuss measures to stabilize the Korean won against the U.S. dollar during the upcoming summit between President Yoon Suk-yeol and U.S. President Joe Biden on Saturday. "We are discussing ways of strengthening cooperation to help stabilize the international finance and foreign exchange markets," according to Kim Tae-hyo, first deputy chief of the presidential Office of National Security.
Yet Kim did not agree with using the word "swap," given the strong fundamentals of the Korean economy. Kim made the statement at a press briefing on Wednesday when he was asked whether the two leaders will discuss the currency swap issue during the summit. He said that the U.S. central bank seeks such currency swap agreements only during times of serious economic crisis.
Calls have been growing for a currency swap to curb the steady depreciation of the won against the dollar, affected by the U.S.' consecutive raising of its key interest rate, prompting the won to slide to around 1,300 won per dollar. Amid the steady decline of the won's value to the lowest point since the 2009 financial crisis, concerns have been increasing over the possible exodus of foreign capital from the local market, potentially causing a shortage of foreign currency reserves.
Seoul and Washington have operated temporary currency swap agreements in the past. For instance, they signed a $60 billion swap pact in March 2020 to be in effect until December 2021, to facilitate Korea's efforts to cope with instability during the continued COVID-19 pandemic. Korea's authorities were thus able to utilize the borrowed dollars to ensure smooth operation of the foreign exchange markets and thus minimize the impact of market turbulence.
Some experts cite the need for the two countries to reach an agreement on the perpetual operation of a currency swap agreement for the sake of strengthening the Korea-U.S. alliance on the economic front. Such an idea, however, lacks feasibility, given the need to meet certain requirements of the U.S. Federal Reserve, such as the complete liberalization of the currency market.
Furthermore, the possible swap agreement is not necessarily favorable to the nation. During a National Assembly confirmation hearing, central Bank of Korea Governor Lee Chang-yong said, "We need to seriously weigh the possible adverse impacts in the event that we completely liberalize the local currency market in order to push for the perpetual operation of the swap agreement." He added that such an agreement could do more harm than good and destabilize the national economy, contrary to expectations.
Despite the need to take a cautious approach to the currency swap issue, it is time for the two allies to discuss measures to step up bilateral cooperation to help stabilize the currency market. Such measures are all the more necessary as Seoul has been expressing its intention to join the U.S.-led Indo-Pacific Economic Framework (IPEF), designed mainly to contain China's influence in the region, despite potential economic retaliation from Beijing. Both countries should come up with tangible steps to help stabilize financial markets and jointly tackle possible volatility during the summit talks. Such steps are also necessary for them to solidify the much-discussed bilateral alliance.