South Korea said Sunday it signed a currency swap agreement with Australia, a deal that it expects will boost bilateral trade and eventually help growth of their economies.

The deal, signed by the central banks of the two countries in Sydney, will allow for the exchange of their local currencies up to 5 trillion won ($4.5 billion) or A$5 billion, according to a joint statement.

This will be effective for three years and could be extended by "mutual consent of both sides," it said. The central bank chiefs are in Sydney to attend a meeting of G20. 

"This agreement is designed to promote bilateral trade for the economic development of the two countries," the statement said. 

"In particular, the agreement will ensure that trade between the two countries can continue to be settled in local currency even in times of financial stress," it added. 

Currency swap is a tool for defending against financial turmoil by allowing a country beset by a liquidity crunch to borrow money from others with its own currency. 

The Korean government has been seeking to utilize currency swap deals with other countries to settle payments for trade in a bid to reduce its dependency on the U.S. dollar.

Australia is South Korea's seventh-largest trade partner with their bilateral trade volume reaching $30 billion in 2013.

The finance ministry here said in a press release that it expects the currency swap agreement to advance economic development of both countries by bolstering bilateral trade, and that such cooperation in the currency sector is "mutually beneficial."

"This is a very timely decision at a time when demand is growing for strengthened financial safety nets in the wake of the U.S. Fed's tapering of quantitative easing," the ministry said. (Yonhap)