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SKorea sees stability in US swap extension

world Updated: Feb 04, 2009 09:36 IST

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South Korea's central bank on Wednesday welcomed a US Federal Reserve decision to extend its currency swap arrangement, and said the move would help "restore stability" to its financial markets.

The Bank of Korea said the 30 billion dollar swap line agreed last October with the Fed during the global financial crisis would be extended for another six months until October 30.

South Korea has used 16.35 billion dollars from the facility so far.

The Federal Reserve has extended its currency swap arrangement with South Korea and 12 other central banks in a move designed to ease remaining jitters in financial markets.

The extension from April 30 "should contribute to improving the foreign currency funding conditions of banks and restoring stability to the financial market in Korea," the Bank of Korea said in a statement.

October's agreement played a major role in easing fears about South Korea's declining foreign reserves and in stabilising the won after the collapse of US investment bank Lehman Brothers.

The won fell 26 per cent against the dollar last year, making it the world's third worst performer against the US unit.

With the extension of the swap facility, the central bank said it will provide dollars to the currency market if necessary.

South Korea also reached new currency swap deals with China and Japan in mid-December, expanding existing lines to 30 billion dollars in each case.

The deal with China will be effective for three years with a possibility of an extension through mutual agreement, while the arrangement with Japan will be in force until the end of April.

"As the swap arrangement with the US is extended, the (central bank) hopes that there will be no major difficulties in extending the swap line with Japan," senior official Ahn Byung-Chan told reporters.

The US extension will help calm concerns over a dollar shortage to some degree, Shin Jin-Ho, a currency analyst at Woori Futures, told Yonhap news agency.

"But given deteriorating exports and the fast-slowing economy, the won is forecast to continue its downward movement until the first half," Shin said.

Exports in January dropped by one-third year-on-year, the steepest decline since South Korea started announcing monthly tallies in 1980.

The International Monetary Fund Tuesday predicted the economy will shrink four percent this year.