What Is a Currency Swap?

In April 2025, Korea's exchange rate against the dollar reached the 1,430 won range, which is a very high level.
If it exceeds 1,500 won, this could act as another serious negative factor for Korea's financial markets.
When the exchange rate rises, the government looks for various policies to stabilize it, and one of them is a currency swap.
Let's look at what a currency swap is.

1. Definition of a Currency Swap
A currency swap refers to an agreement between the central banks of two countries to exchange their own currencies at a fixed exchange rate.
2. How a Currency Swap Works
A country lends its own currency to the other country's central bank and borrows the other country's currency from that central bank.
< Example >
1) Assume the Bank of Korea and the U.S. Federal Reserve sign a currency swap agreement worth 50 billion dollars.
2) The Bank of Korea provides the Fed with won equivalent to 50 billion dollars according to the agreed reference exchange rate.
3) The Fed provides 50 billion dollars to the Bank of Korea.
4)When the contract period expires, each side returns the principal and interest according to the originally exchanged exchange rate and interest rate.
3. Effects of a Currency Swap
When a currency swap is signed, the supply of foreign exchange increases, reducing exchange rate volatility, and in particular it has the effect of preventing a sharp rise in the exchange rate.
Even a country with insufficient foreign exchange reserves can secure additional foreign currency through a currency swap to defend against a foreign exchange crisis.
A country that has signed a currency swap with a major power gains credibility in international financial markets, and its sovereign credit rating remains stable.
In addition, companies can easily secure foreign currency, so import and export transactions run smoothly and trade costs fall.

Therefore, a currency swap is a powerful financial policy tool that supplements foreign exchange reserves and stabilizes the exchange rate.
In particular, it plays a role in strengthening cooperation between countries in situations such as foreign exchange crises or trade disputes.
The current exchange rate in the 1,400 won range is expected to persist for the time being, but an exchange rate close to 1,500 won poses a major risk to financial markets, so I hope it stabilizes soon.