U.S. places Korea on FX rate monitoring list

The United States put Korea and four other countries on its monitoring list in order to watch unfair exchange rate policies in these places.

As a result, Korea is facing pressure from the United States to reduce its surplus from exporting goods to the American market and limit the government’s intervention in the foreign exchange (FX) market.

According to a report entitled “Foreign Exchange Policies of Major Trading Partners of the United States,” released by the U.S. Department of the Treasury on Sunday, authorities of Korea and four other countries are suspected of having intervened in their FX markets.

“China, Japan, Germany and Korea are identified as a result of a material current account surplus combined with a significant bilateral trade surplus with the United States,” the department said in the report.

Unlike the four nations, Taiwan has been identified as a result of its material current account surplus and its persistent, one-sided intervention in foreign exchange markets, according to the report.

The department put the five countries on its list in order to monitor any unfair foreign exchange rate policies in these countries.

“To be accurate, Korea is just on the list for close monitoring,” the Ministry of Strategy and Finance and the Bank of Korea both underscored in separate statements on Sunday.

“There will not be additional measures on the countries other than monitoring.”

The countries made it onto the list because they satisfied two of the three criteria that the Treasury Department created for enhanced analysis: An economy having a significant trade surplus of larger than $20 billion with the United States, an economy with a material current account surplus larger than 3 percent of that economy’s gross domestic product, and an economy engaged in persistent one-sided intervention in the foreign exchange market and with net purchases of foreign currency that amount to more than 2 percent of its GDP. Countries meeting all three criteria will be designated as FX manipulators.

Korea’s goods exports to the U.S. stood at $2.83 billion in 2015, while its current account surplus posted 7.7 percent of the GDP.

The U.S. Treasury Department said that Korean authorities seem to have stepped in, selling $26 billion total from late 2015 through March 2016.

“The Treasury estimates that during the second half of 2015 through March 2016, the Korean authorities intervened to resist depreciation of the won during periods of financial market turbulence, selling an estimated $26 billion in foreign exchange, including activity in the forward and swaps market,” the report said. It recommended that the authorities limit their intervention to resolving disorders in the market.

As the Trade Facilitation and Trade Enforcement Act took effect in the United States this year, the United States will issue verbal warnings to those considered manipulating the exchange rates and even apply practical penalties if needed.

Also, the United States is putting pressure on the Korean government to refrain from resisting the won’s appreciation, but a strong won is known to have negative impact on already-struggling exporters.

The Korean government has been making constant efforts not to be included on the list. Korean Finance Minister Yoo Il-ho, in a meeting with Jacob J. Lew, secretary of the Treasury, at the annual meetings of G-20 nations’ finance ministers held on April 15, underlined the fact that Korea’s exchange rates are decided by the market, while government intervention is confined to exceptions such as sharp fluctuations in short-term periods.

It turns out that such efforts were in vain.

Seoul will now have to be aware of U.S. monitoring in staving off overseas speculative forces.

“The government might not be able to do something because it is under the U.S. watch, even when there are suspicious FX rate changes,” said Hong Chang-eui, business professor at Catholic Kwandong University.

Korea’s exports have been declining for the 16th consecutive month, putting a dent in economic growth, due to slower demand and a stronger won against the dollar.

In April, exports dropped 11.2 percent from a year earlier, data by the Ministry of Trade, Industry and Energy showed.

Exports to major trading partners - the United States, China and the European Union - continued falling last month, the ministry said.

Exports to the United States dropped 6.6 percent because of a decrease in consumption expenditure, weaker-than-expected output of the U.S. manufacturing sector and hence diminished demand for automobiles and steel products.

Korea’s exports with China plunged 18.4 percent in April due to slowing growth and falling demand for semiconductors and flat display panels.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]