November 26, 2024

• 

Korean won banknotes and coins (123rf)

South Korea has been removed from the US Treasury Department’s list of trading partners that it closely monitors for unfair foreign exchange practices, according to the department’s announcement Tuesday. It is the first time since 2016 for Korea to be pulled from the list.

In its biannual report to the US Congress, the US Treasury placed six economies on its "monitoring list" -- China, Germany, Vietnam, Malaysia, Singapore and Taiwan -- and removed South Korea and Switzerland. Vietnam was newly added to the list.

The US Treasury biannually assesses the macroeconomic and exchange rate policies of its 20 major trading partners based on three criteria. An economy is removed from the monitoring list when it meets one or none of the three criteria for two reports in a row. If a country triggers two or more criteria, further restrictions follow.

The three criteria are a trade surplus with the US over $15 billion, a current account surplus surpassing 3 percent of the country’s gross domestic product and the extent of intervention in foreign currency shown by net purchases of at least 2 percent of GDP.

Korea was excluded from the list as it met only one of the three criteria -- that regarding trade surplus with the US -- for two consecutive reports. The reports show the figure stood at $37 billion throughout the year of 2022 and at $38 billion between July 2022 and June 2023, well above the $15 billion bar.

With its slump in exports, Korea did not meet the criterion for current account balance during the period. Korea’s current account surplus remains far from surpassing the threshold set at 3 percent of national GDP. The figure stood at 0.5 percent during the assessment period, according to the US Treasury.

Furthermore, while the clause involving intervention on the foreign exchange market criterion is intended to guard against net purchases of the US dollar, Korea has been maintaining a net selling stance on the greenback to defend the Korean won’s value since last year.

According to the Bank of Korea, net selling of the US dollar extended to around $40 billion. In the first half of this year, Korea sold off $8 billion to strengthen the won's value.

“Removal from the watchlist gives Korean authorities the room to intervene in the foreign exchange market in the case of volatility, carrying out what we call a ‘smoothing operation,’” said Kim Hyo-sang, head of the international finance team at the Korea Institute for International Economic Policy.

"This, of course, does not directly precipitate more involvement from authorities, as severe intervention could lead to manipulation suspicions," Kim said.

Despite the removal, the Korean won’s exchange rate against the US dollar remained steady on Wednesday. It closed at 1,310.6 won, up 2.7 won from the previous trading day. After opening at 1,306 won, it fluctuated in the 1,300 range.

Industry sources said the exclusion would not directly affect the Korean won’s exchange rate against the US dollar.

“The US Treasury is likely to continue to exclude Korea from the watchlist in the first half of next year, as it is projected the current account balance will not surpass the threshold then, too,” said economist Park Hee-chan of Mirae Asset Securities.

"The decision does not specifically impact the forecast on the currency exchange rate. Though Korea has been pulled off the watchlist, the authorities' stance on foreign exchange intervention is unlikely to be affected,” Park said.

The Korean won slightly strengthened earlier this week, compared to an exchange rate that hit 1,360 won at the end of September, as the local market gained traction following the Korean government’s short selling ban. Projections that the US Federal Reserve’s rate-hike cycle will end soon also helped the Korean won gain value against the greenback.

Meanwhile, the US Treasury did not designate any trading partner as a currency manipulator. If so designated, the country could be be imposed trade sanctions by the US government.

But it further mentioned China must be monitored closely for its lack of transparency regarding key features of its foreign exchange system, adding it makes the country "an outlier among major economies."

By Im Eun-byel  (silverstar@heraldcorp.com)