Bank of Korea chief Rhee Chang-yong (Yonhap)
South Korea's pension operator and the central bank are taking steps for a currency swap agreement as the Korean won tumbled to its lowest level against the US dollar in 13 years on Thursday.
The National Pension Service will borrow the greenback it needs to invest overseas from the Bank of Korea, instead of buying it from the foreign currency market, and loan Korean won to the bank in return. The last currency swap deal between the two was dissolved in 2008 as the BOK demanded an end, citing a lack of foreign currency.
The NPS plans to discuss the currency swap at its fund management committee meeting to be held on Friday.
Investing between $20 billion-$30 billion in foreign stocks and bonds each year, the Korean national pension fund is a major player in global capital markets. There have been concerns that the NPS’ massive investments overseas add to the upward pressure on the won-dollar exchange rate.
As the Korean won continues to weaken against the US dollar, South Korea is expected to post monthly trade deficits for the sixth month in a row for the first time since 1997. The country’s cumulative trade deficit from January to Sept. 20 this year amounts to $29.2 billion, already much higher than its biggest-ever annual trade deficit of $20.6 billion in 1996.
Meanwhile, as the US Federal Reserve raised its benchmark interest rate by another 0.75 percentage points on Wednesday, the BOK is likely to revise its earlier “forward guidance” of gradually raising its rate by 0.25 percentage point until the year-end.
The precondition for this earlier guidance has changed, BOK chief Rhee Chang-yong told reporters after his meeting with the nation’s top financial authorities Thursday morning.
“The expectation that the US Fed rate will reach an end point at around 4 percent has changed a lot in the past month,” Rhee said.
As the BOK still has two to three weeks left until the next rate-setting meeting on Oct. 12, Rhee said it will review how the latest US rate hike affects Korea’s consumer prices, economy and foreign currency market, and decide on the degree and timing of a rate hike.
The US Fed remains open to the possibility of raising the rate by another 1.25 percentage points in its two remaining policy meetings this year.
When asked about a possible currency swap deal between Korea and the US, Finance Minister Choo Kyung-ho said a currency swap would clearly help, but it would be inappropriate to talk about it now.
Choo said he will refrain from commenting on the current won-dollar exchange rate, but said the government will take timely action when necessary.
Rhee said he won’t deny that the BOK and the NPS are discussing a currency swap, adding that a strong US dollar and declining foreign currency reserves are common problems shared by countries around the world, not just Korea.
By Kim So-hyun (firstname.lastname@example.org)