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November 2022
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November 2022
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Korea central bank sets up US$10 billion currency swap with NPS

The currency swap deal will last through the end of this year to allow NPS to access the bank’s foreign exchange reserves
By Goh Thean Eu   
September 27, 2022

The Bank of Korea is setting up a US$10 billion currency swap with the National Pension Service (NPS) to give the pension giant access to the central bank’s foreign exchange reserves for its US dollar investments, and ease demand for greenback in the spot market.

The move comes as the US dollar continues to strengthen against the Korean won and other currencies as the Federal Reserve hikes interest rates to battle inflation. Last week the Fed raised interest rates by 75 basis points for the third consecutive time, its fifth rate increase this year.

The Korean won, which recently traded at its lowest level in around 13 years, has lost 16% of its value against the greenback thus far in 2022 as investors looking for safe haven assets drive up demand for the US dollar.  

The Bank of Korea’s swap arrangement with the NPS will last through the end of this year.

“The NPS can secure funds needed for overseas investment without counterparty risks, and it is also expected to stabilise the currency market by easing the fund’s dollar demand from the spot foreign exchange market,” the central bank says in a statement recently.

The swap deal may help slow down the won’s depreciation in the short term but isn’t likely to stop the Bank of Korea from raising interest rates, according to a Singapore-based fund manager who invests in North Asian equities.

“Even though about 46% of NPS’ investment portfolio are foreign assets, a currency swap deal like this can only be a short-term solution. It won’t take too much pressure away from the Bank of Korea to increase its key rates,” he tells Asia Asset Management, speaking on condition of anonymity.

The Korean central bank has also been raising interest rates to rein in local inflation, with three increases this year, mostly recently on August 25, bringing its key rate to 2.50%.

The NPS had 882.7 trillion won ($654.12 billion) of assets under management as of end-June.