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Four Currencies that benefit from Currency Swap

Published on 8 February 2017 in News - Pages by Raffick Marday

Four Currency Swap

A currency swap involves the exchange of currencies between two parties. During the swap, the principal loan and accumulated interest are offered to a party in another currency. The practice is common among central banks of many countries. Its purpose is to obtain cheaper debt by borrowing at the best rates and to reduce the effect of economic and political volatility to a currency.

Four Currencies that would benefit from Currency Swap

In recent weeks, the dollar has been strengthening and this has caused financial turmoil in markets all over Asia and Europe. It is expected that in the coming year a new administration in the US will pursue expansionary fiscal policies. This will push up interest rates, which will further strengthen the dollar. The overall effect is expensive debt on the part of many countries around the world.

Just last month, following the surprise election of Donald Trump, the value of the Japanese Yen, the Chinese Yuan took a nosedive. The South Korean Won and the Egyptian pound have not been as affected as the other two but the bullish dollar is set to make them wobble a bit. And it seems the central banks of the four countries have already sensed the changing tide.

On Tuesday, Egypt and China signed a currency swap deal. In this deal, China will be able to carry out any transactions in Egypt using the Egyptian pound while Egypt will transact in Yuan in China. It is widely expected that this move will boost Egypt’s foreign reserves by a great deal. The reserves have taken a hit since Hosni Mubarak was pushed out of power five years ago. High foreign reserves in Egypt will boost the value of the Egyptian pound. In china, the move is expected to reduce demand for US dollars significantly and therefore push the Yuan up.

Further afield, Asia’s three most powerful economies, China, Japan and South Korea are being urged to make similar agreements with each other. South Korea’s economy is highly globalised with many of its companies extending their wings to many countries. Should Trump pursue protectionist economic policies, as he has already intimated that he will, the one will be one of the biggest casualties. Trump has already displayed unfriendly relations with China, first by claiming that China manipulates its currency and then by attempting to establish diplomatic ties with Taiwan on Monday. China’s economy stands to lose foreign investors during a Trump administration. This will affect the value of the Yuan negatively.

Japan is getting much better treatment from a Trump presidency, at least for now. Bilateral relations between the US and Japan seem to be warming up. However, the warm relations have done little for the volatile Yen which has struggled significantly against the US dollar over the past few weeks.

The Yen, Yuan, and Won would benefit significantly from a trilateral currency swap just as the Egyptian pound is gaining. Such an exchange would reduce dependency on the US dollar, would boost their foreign exchange reserves and increase financial liquidity in the long term. Investors will be hoping for such an agreement between these three states in the coming weeks.

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