Exchange Rate Falls but Korea Remains on Currency Watchlist... Foreign Exchange Authorities Face Dilemma (Comprehensive)

Foreign Exchange Authorities Have Less Room for Active Intervention
Situation Makes It Difficult to Counter the Won's Strengthening Trend

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] South Korea has failed to exit the United States' 'Currency Watchlist.' With the recent sharp decline in the won-dollar exchange rate, there is little room for active intervention, deepening the concerns of the foreign exchange authorities. If the authorities intervene to prevent the exchange rate from falling, it could lead to the worst-case scenario of being designated a currency manipulator in the future.

On the 16th (local time), the U.S. Department of the Treasury released its currency report, maintaining South Korea, China, Japan, Germany, Italy, Singapore, and Malaysia on the watchlist. India, Taiwan, and Thailand were newly added to the watchlist. Watchlist countries are subject to continuous monitoring by the U.S. for currency manipulation. Switzerland and Vietnam were designated as currency manipulators.

The U.S. criteria for designating currency manipulators over the past year include: ▲a bilateral trade surplus with the U.S. exceeding $20 billion ▲a current account surplus exceeding 2% of gross domestic product (GDP) ▲net purchases of dollars in the foreign exchange market exceeding 2% of GDP. Watchlist countries are under continuous surveillance by the U.S. Treasury. According to the Treasury, South Korea showed a $20 billion trade surplus with the U.S. and a current account surplus ratio of 3.5% of GDP. These figures were analyzed by the U.S. Treasury over the past year as of June this year. South Korea remained on the watchlist due to the first two criteria.

Although not designated as a currency manipulator, remaining on the watchlist is not welcome news. Recently, the dollar has weakened, leading to a relatively strong won, leaving little room for the foreign exchange authorities to respond.

If the authorities buy dollars to lower the won's value, they will inevitably attract the attention of the U.S. Treasury. While smoothing operations or verbal interventions to adjust at an appropriate level are possible, these measures are insufficient to curb the won's strength. However, the authorities cannot simply stand by. Given South Korea's export-driven economic structure, a strong won is disadvantageous to export companies. Especially, small and medium-sized exporters who cannot easily hedge currency risks or produce through overseas local subsidiaries are likely to suffer significant damage.

Experts expect the won's strength to continue as the dollar's weakness persists structurally. The dollar index, which measures the dollar's value against six major currencies, fell to around 90.15 during trading that day. The dollar index had exceeded 102.8 at the end of March during the early spread of COVID-19 due to a dollar shortage, but the dollar's value declined due to the U.S. Federal Reserve's continuous monetary easing. As accommodative monetary policies continue amid the resurgence of COVID-19, the dollar's value is likely to fall further. Experts predict the won-dollar exchange rate could drop to the 1,040 won level by the first half of next year. As of 10:46 a.m. that day, the won-dollar exchange rate was trading at 1,093.25 won in the Seoul foreign exchange market, below 1,100 won.

Since the won-dollar exchange rate decline follows a global trend, there are opinions that it is difficult for the foreign exchange authorities to respond. A market insider said, "The recent strength of the won is an inevitable result of South Korea's relatively high economic growth rate and current account surplus," adding, "It is a natural situation where one must bear the weight of the crown."

This content was produced with the assistance of AI translation services.