“Sustainably seek policies to respond to market conditions” (5th)
“We will take multifaceted measures step by step according to market conditions” (22nd)
When the US Federal Reserve Board (FRB) decided to raise the interest rate by 0.75% on the 21st (local time), the Korean won dropped to 1,400 won per dollar. Deputy Prime Minister and Minister of Strategy and Finance Choo Kyung-ho stepped up his remarks as the won’s depreciation against the dollar continued unabated. He shifted the emphasis from “seek” to “take action.” It is said that the dollar is going to act positively because the won is depreciating against the dollar, exceeding 1,400 won to the dollar.
The first stage of the measures is “insider” management. This is based on the government’s perception that excessive dollar exchange demand and dollar buying by domestic pension funds and import/export companies will further exacerbate instability in the foreign exchange market.
At an emergency macroeconomic and financial meeting that day, Deputy Prime Minister Chu said, “We will carefully manage the detailed factors that affect price variables behind the exchange rate level.” “We will take multifaceted measures step by step to alleviate the imbalance in the supply and demand of foreign currencies, such as resolving the problem of the supply and demand of foreign currency funds for importers,” he said.
First, the Bank of Korea (BOK) formalized the promotion of a currency swap with the National Pension. BOK Governor Lee Chang-young, who attended an emergency macroeconomic and financial meeting that day, said he was “discussing a currency swap with the National Pension,” adding that he would “discuss and announce it soon.” .
This means an agreement to exchange Korean won held by the National Pension for dollars held by the Bank of Korea. As the national pension does not have to raise the dollars needed to invest overseas, it will contribute to the stability of the exchange rate to some extent. It is the first time in 14 years since 2008, the time of the financial crisis, that the Bank of Korea and the National Pension have resumed currency swaps. In addition, the Ministry of Strategy and Finance reportedly demanded that companies refrain from stockpiling dollars at meetings of import-export companies.
The government has also hinted at a South Korea-US currency swap as a “last resort.” It was reported that President Yoon Seok-yeol and US President Biden agreed to “cooperate closely to implement the liquidity provision mechanism for financial stability as necessary.”
Of course, it is the same as what was announced at the meeting between Deputy Prime Minister Choo and US Treasury Secretary Yellen in July, and there is no mention of the South Korea-US currency swap. Instead, the leaders of the two countries referred to a “liquidity supply device,” raising expectations that the two countries may conclude a South Korea-US currency swap in the future.
However, neither the management of import-export companies nor the currency swap between the Bank of Korea and the National Pension Plan is a fundamental remedy. This is because the Fed has made it clear that it will continue to raise interest rates. If the policy interest rate differential between South Korea and the US widens further, the dollar shortage will only get worse. If the current account turns to a deficit in August and official data confirms a decline in exports in September, it will be a bigger problem.
The government’s remarks, `Don’t buy the dollar,` cannot be accepted by domestic import/export companies. The national pension is also not a reliable safety valve. During the financial crisis of 2008, the National Pension provided back support in the foreign exchange market through currency swaps with the Bank of Korea and suspension of foreign stock investment. However, when foreign exchange reserves fell below 200 billion dollars due to a serious shortage of dollars, the Bank of Korea notified the National Pension to suspend the currency swap, citing the urgent need to secure dollars.
The currency swap with the US is just a temporary measure. When the agreement was first concluded in October 2008, it had a strong effect of making the won more than 200 won stronger against the dollar, but that was the only time. The Korean won hit its lowest price (1,570.3 won to the dollar) in March 2009 after the Korea-US currency swap was signed during the financial crisis.
A winter in the foreign exchange market is inevitable unless the “King Dollar” problem is resolved. Kim Seung-hyuk, a researcher of NH Futures, said, “The dollar is expected to continue to be under pressure in the October-December quarter of this year.” It depends on whether it manifests itself as a crisis.”