South Korea and Australia agreed to extend and double bilateral currency swap arrangement for another three years amid increased volatility in the foreign exchange and global financial market.

The two nations’ central banks Bank of Korea and Reserve Bank of Australia announced on Wednesday that they agreed to renew the currency swap contract signed on February 23, 2014 until February 7, 2020, and double the cap to 9 trillion won (AU$10 billion, $7.7 billion) from 5 trillion won (AU$5 billion).

A currency swap is an agreement between two countries that enables them to exchange their currencies at a specific rate in times of crisis. The two countries also agreed to use the deal not just as a means of trade settlement but also stabilizing financial market.

Australia boasts AAA credit rating by global ratings agencies such as Standard & Poor’s. The Australian dollar is the fifth most traded currency in the world. The contract extension with the country would help Korea maintain its foreign exchange reserves at a time when anxiety is growing in the global financial market.

“The currency swap with Australia would contribute to stabilizing Korea’s financial market and enhancing economic and financial cooperation of the two countries,” said BOK.

The foreign currency market has been rocky ever since unorthodox candidate Donald Trump won the U.S. election. Trump’s explicitly protectionist and anti-free trade agenda and currency attack on trade majors on top of anticipation of faster-than-expected interest rate increases in the U.S. raise concerns for the country whose balance sheet is heavily exposed to external risks. Currency swaps along with foreign exchange reserves are effective ways to stack up ammunitions for emergency. But protracted vacuum in leadership due to impeached president has made neighboring states use the currency swap arrangements for diplomatic pressure. Japan walked away from negotiations on renewing currency swap agreement due to conflict over installment of statues symbolizing wartime victims of sexual slavery, and China could refuse to renew its pact that expires in October over complaint about deployment of U.S.-led antimissile system in Korea.

By Boo Jang-won

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