Korea FX authorities, NPS agree on currency swap; won flat

South Korea’s foreign exchange authorities and the state-run National Pension Service (NPS) agreed to open a currency swap line for the first time in 14 years as the country struggles to support the ailing won currency.

The South Korean currency, however, closed the domestic foreign exchange session almost flat, giving up its earlier gains, indicating sustained pressure from the US Federal Reserve’s aggressive interest rate hikes.

The deal to be signed by NPS and the authorities -- the Ministry of Economy and Finance and the Bank of Korea -- will allow the world’s third-largest pension fund to borrow up to $10 billion with maturities of six months or one year from the central bank's foreign exchange reserves in exchange for won. The NPS invests about $30 billion in overseas assets such as stocks and bonds.

“The deal is expected to stabilize supply and demand in the foreign exchange market as the NPS’ demand for spot currencies eases,” the ministry and the central bank said in a statement on Friday. “It will reduce foreign exchange reserves during the contract period, but the decrease will be temporary because the full amount will be returned all at once at maturity.”

The authorities plan to launch the deal as soon as they complete the remaining details such as signing the contract.

The NPS also decided to raise the limit on short-term foreign currency fund holdings to $3 billion from $600 million to minimize the impact on the won of fresh dollar purchases in the currency market.

The fund has been blamed for the recent won’s weakness as it increased overseas investment.

SAVIOR OF THE WON?

Currency market participants doubt if the swap deal can prop up the won, the worst performer among emerging Asian currencies with a 15.6% loss against the dollar so far this year, given the US Fed’s hawkish stance to fight rampant inflation in the world’s top economy.

Reflecting the sentiment, the won ended local currency market trade at 1,409.3 per dollar, compared with its previous close of 1,409.7. The South Korean unit had strengthened as much as 0.5% to 1,402 during the session but failed to maintain the gains on the greenback’s strength.

The local currency on Thursday weakened past the psychologically important 1,400 per dollar level for the first time since the 2008-09 global financial crisis, skidding to as soft as 1,413.4 per dollar, its weakest level since March 31, 2009.

“It is hard to say that the 1,500 level is safe as the 1,400 level was breached in an instant,” said Min Kyung-won, an economist at Woori Bank.

NH Futures analyst Kim Seung-hyuk said the won’s next levels would be 1,450 and 1,500.

INTERVENTION

Currency traders, however, remained wary of potential dollar-selling intervention by the authorities as senior officials stepped up their warnings against the won’s weakness.

“We will actively deal with unilateral herd behavior such as increasing speculative sentiment due to the won's recent weakness,” Finance Minister Choo Kyung-ho said in an emergency meeting on Thursday. “We will strictly adhere to the policy of adamantly and quickly taking measures by all means when necessary.”

South Korea was also known to have been seeking a currency swap with the US, although it is not clear if Washington is interested in such a deal.

Such a swap would allow South Korea to borrow a certain amount of dollars for a pre-set period and rate, in exchange for won, to alleviate difficulties in dollar liquidity.

Write to Do-Won Lim, Jun-Ho Cha and Jin-gyu Kang at van7691@hankyung.com
Jongwoo Cheon edited this article.