A US think tank has warned that the United States should not abuse currency swaps as a political tool. The argument is that dollar swap lines are not rewards for allies but should be provided to countries with strong economic fundamentals to ensure global financial market stability. The issue draws attention for Korea as well, which faces a growing need for a foreign exchange safety net ahead of its $350 billion investment in the United States.
According to the Peterson Institute for International Economics (PIIE) on Thursday, senior fellow Adnan Mazarei and Maurice Obstfeld, professor emeritus at UC Berkeley, said in a recent report that "an excessive expansion of swap lines for geopolitical purposes could harm the dollar and central bank independence." PIIE is a Washington, DC-based think tank specializing in international economics, and has also served as a forum for public discussion where officials from central banks, including the Bank of Korea, and financial authorities express their policy views.
The researchers warned that the administration of US President Donald Trump should not use dollar liquidity as a diplomatic "carrot." The US Treasury Department provided a swap to Argentina and is reportedly reviewing a request from the United Arab Emirates (UAE). They pointed out that if currency swaps become subject to political bargaining, the dollar's status could be downgraded over the long term.
Accordingly, the researchers stressed that the Federal Reserve's swap lines should be operated based on economic criteria rather than political judgment. Recipient countries should have large economies, high openness in financial and trade markets, and stable macroeconomic conditions and policy credibility. Whether they can actually ease dollar liquidity shortages and contribute to financial market stability was also presented as a key requirement.
They further recommended that when geopolitical judgment is needed, it would be preferable to use the US Treasury's Exchange Stabilization Fund (ESF) rather than the Fed. The aim is that since the Fed's swap lines serve as a safety net for the global dollar market, they should be kept separate from political purposes.
Such principles carry significant implications for Korea as well. During the 2008 global financial crisis, Korea was included among the recipients of the Fed's temporary swap lines, along with Brazil, Mexico, and Singapore.
In particular, Korea's need for a foreign exchange safety net is bound to grow. If dollar demand becomes concentrated during the process of US investment, which requires raising up to $20 billion annually over the next 10 years, upward pressure on the won-dollar exchange rate and foreign exchange market instability could intensify.
However, concluding a currency swap remains a difficult task. Currently, the Fed's standing, unlimited swap lines are permitted only to five major central banks: the European Central Bank (ECB) and those of the United Kingdom, Japan, Switzerland, and Canada. The latest report also did not directly mention Korea as a candidate for a standing swap line.
"The principle that economic size and openness, macroeconomic stability, and contribution to financial markets should serve as criteria is not unfavorable to Korea," a senior financial industry official said. "There is a need to actively explain to the US side the necessity of cooperation in stabilizing exchange rates."
