2 days ago
US Treasury keeps Korea on currency manipulation watchlist
Washington signals potential broadening of forex monitoring policy, raising concerns in Seoul over the roles of public funds
South Korea remained on the US Treasury Department's currency-monitoring watchlist updated Thursday, signaling heightened scrutiny over potential currency manipulation accusations.
The US Treasury issued the Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States report, maintaining Korea on the monitoring list for extra foreign exchange scrutiny.
Korea was first added to the watchlist in April 2016. It was dropped from the list in November 2023 but was reinstated in November 2024.
The semiannual currency report assesses the trade balances and currency practices of major US trading partners.
Countries are automatically placed on the monitoring list if they meet at least two of three conditions: a bilateral trade surplus with the US of at least $15 billion, a current account surplus exceeding 3 percent of gross domestic product, and forex market intervention — in other words, persistent net purchases of foreign currency.
Korea remained on the watchlist for posting a $55 billion trade surplus with the US and recording a current account surplus equivalent to 5.3 percent of its gross domestic product.
It did not meet the threshold for forex market intervention, as it had intervened in the market to strengthen the Korean won in 2024 by selling the greenback instead of purposely weakening the local currency.
'Korean authorities reported net sales of $11.2 billion for all of 2024, approximately 0.6 percent of GDP and concentrated in the second quarter of the year,' the report stated.
The US Treasury warned against any form of market intervention in the report, underpinning, 'Korea should continue to limit currency intervention to exceptional circumstances of disorderly foreign exchange market conditions.'
The currency report, issued for the first time since US President Donald Trump took office, was expected to provide insight into the US administration's stance on exchange rates.
As anticipated, the US Treasury signaled plans to enhance its scrutiny of trading partners' currency policies and practices in future assessments.
It indicated that it may begin monitoring not only traditional forms of foreign exchange intervention but also other tools that could influence exchange rates for competitive advantage, including the use of capital flow management measures, macroprudential policies and activities by government-affiliated investment vehicles such as pension funds or sovereign wealth funds.
This expanded scope raises potential concerns for Korea, where major institutional investors such as the National Pension Service, one of the largest pension funds in the world, and the sovereign wealth fund Korea Investment Corporation, play a significant role in cross-border capital flows.
The state-run fund operators are major buyers of dollars on the forex market. When making foreign investments, they buy dollars, which adds pressure on the buying side of the greenback, consequently strengthening the dollar and weakening the Korean won.
Though both funds do not share their asset allocation by country, significant portions of the NPS and the KIC's investments are tied to the US.
As of December, the NPS holds assets worth roughly $210 billion in the North American stock markets and $30 billion in US bonds, while the KIC operates assets amounting to approximately $125 billion in US shares.
Since the US flagged forex policy as a discussion item in trade talks in April, market watchers have speculated that the role of the NPS could become a touchy subject in policy discussions with the country.
'The NPS tripled its advance FX purchase limit to $3 billion from $1 billion per month in September 2024 and expanded its swap arrangement with the Bank of Korea from $50 billion to $65 billion in December 2024,' the report stated, explaining the pension fund operator can borrow dollars from the central bank's reserve for overseas investment.
The Finance Ministry announced it will continue communicating with the US Treasury to deepen bilateral understanding.
"The Korean government will continue to strengthen mutual understanding and trust on foreign exchange policy through communication with the US Treasury,' the Finance Ministry stated through a press release.
"Ongoing forex negotiations between the financial authorities of Korea and the US will be carried out carefully and thoroughly,' the ministry stated, referring to the trade talks between Seoul and Washington.
Along with Korea, eight other countries, including China, Japan, Singapore, Taiwan, Vietnam and Germany, were on the monitoring list, with Ireland and Switzerland newly added. The US Treasury further stated that no major trading partner was found to have manipulated its currency in 2024.
