SEOUL– Maurice Obstfeld, a renowned U.S. economist, said Wednesday the opening of a currency swap line will help stabilize the foreign exchange market but voiced doubts about the possibility of the U.S. clinching a standing swap line deal exclusively with South Korea.
Obstfeld, a professor at the University of California Berkeley, also dismissed concerns that the Korean won’s recent sharp weakness against the U.S. dollar might point to the country facing another financial crisis.
The professor was in Seoul to deliver a keynote speech at the G20 global financial stability conference, co-hosted by the finance ministry and the Korea Development Institute (KDI).
“I’ve long been an advocate of more extensive international swap lines,” Obstfeld told reporters.
He said he hopes to see the Fed clinch permanent swap lines with more countries as the swap facilities will help promote global financial stability and stabilize the foreign exchange market.
“I personally think Korea is the terrific candidate for such a standing swap line, though I wouldn’t expect the Fed to extend a line exclusively to Korea.”
South Korea’s presidential office said President Yoon Suk-yeol and U.S. President Joe Biden could discuss the possibility of a currency swap deal between the two countries when they meet in New York this week on the sidelines of the U.N. General Assembly meeting.
South Korea’s $60 billion currency swap line with the U.S. expired at the end of last year. The Bank of Korea and the Fed signed the swap facility in March 2020 to ease market routs caused by the pandemic and had extended the deal three times.
Market experts raised the need to reopen the currency swap line with the U.S. as the South Korean currency has sharply slid some 14 percent against the greenback amid the Fed’s aggressive monetary tightening.
Last week, the won tumbled below the 1,390 won mark against the U.S. dollar for the first time in over 13 years. The won’s sharp weakness has raised concerns about capital outflows and complicated policymakers’ efforts to curb inflation.
“Now I understand that for some the current level of the exchange rate creates a cycle, a psychological reminder of past crises. Korea has definitely not been anything comparable to those past crises of the late 90s or the late early 2000s,” Obstfeld said.
The former chief economist at the International Monetary Fund said the won’s real effective exchange rate is “actually quite strong in historical terms” and Korea’s economic fundamentals remain in a “robust shape.”
He also said he does not think foreign exchange authorities’ intervention in the currency market is effective and recommended South Korea safeguard its foreign reserves for other purposes.
Source: Yonhap News Agency