Currency Swap – Effectively Rejuvenating BRICS Currency?

The deals of Forex arrangement between nations has minimized the intervention of US dollar reducing the dollar role in intra trade between the dealing countries. This is affecting the global holding of dollar in foreign exchange trade and strengthening other currencies.

Forex Swap, also known as Currency Swap, is an over-the-counter transaction with the arrangement of exchanging the local currencies between the concerned parties. Its over-the-counter property provides the required flexibility of setting up terms and conditions. This was first introduced in 1970's by the United Kingdom companies to reduce the cost of premium to borrow US dollars. This arrangement of the UK entities was with US companies who were ready to borrow Sterling. Since then, there have been lot of up-gradation in the swapping needs and demand which has made currency swapping a well versed strategy for the economies to curtail the Forex expenses and reserves.

The strategy of swapping of currencies has hit the year 2013 with immense hope for BRICS nations. There has already been few deals by the BRICS nations and between the BRICS nations. One of the latest improvement in such deals is the increase in the amount for Swap between India and Japan from $15 billion to $50 billion. Looking forward from this positive activity with Japan, Indian government has made list of 23 countries which have trade affairs with India. These countries are basically oil exporting nations which do provide oil exports to India. The action of identifying such countries for Forex swap arrangement is the result of $10.7 billion value decrease of India's foreign exchange reserves in the first half of the current fiscal year. China, one of the biggest economy in the pool of nations has also actively participated in regulating depletion of foreign exchange reserves through same methods. China and Brazil have announced currency swapping arrangement worth $30bn during the BRICS summit on 26th March 2013. Along with this China has also signed a swap deal with European central worth $75bn. Currently, the intra-swap amount within the pool of nations is approx $307bn which is expected to grow and surpass $500bn by the end of year 2015. Chinese Yuan is the only currencies which has kept its strength intact against the US dollar whereas Indian rupee, Russian ruble, South African rand and Brazilian real all have faced steep depreciation of their currency value against US dollars. The dollar accounts for 40% of foreign exchange in the world trade and has kept the momentum with itself for more then five decades to emerge as the strongest currency which has made emerging nations such as India, Brazil, South Africa, etc. sweat to purchase dollars.

Is this arrangement of swapping currencies has really made any effect for the emerging nations? Or it is just a strategy to keep the dollar out of the path to overcome the hurdle of depreciating value of their currencies? Its really debatable to find out the relevance of currency swapping but I feel somewhere the currencies are getting stabilized as due to reducing movement of dollars within BRICS nations. This is bringing back the confidence of investors to make profits in foreign exchange with acceptable movement in currency value. The Forex brokers are en-cashing this situation and making money out of commission generated by investors trades. This strategy of currency-swap may work or may not work for economies but the Forex brokers are making living out of it.

M. Azeem, Ceo – Readyforex.com is a trader specialized in currency trading, his main purpose is to provide a better connectivity with leading Forex brokers.