South Korea has been removed from the U.S. currency manipulator watchlist for the first time. This move comes with recognition of the transparency in South Korea’s foreign exchange policies and marks a significant step towards stability in the value of the South Korean won, providing some relief for the nation’s foreign exchange authorities.
On Nov. 7 (local time), the U.S. Department of the Treasury released the 2023 second-half currency report, which removed South Korea and Switzerland from the list of countries under scrutiny for currency practices, and added six new countries, including China, Germany, and Vietnam. When compared to the first half of the year, South Korea and Switzerland have been removed, and Vietnam is a new addition to the list. This marks the first time South Korea has been removed from the watchlist since the enactment of the Trade Facilitation and Trade Enforcement Act in February 2016.
Since making the Trade Facilitation and Trade Enforcement Act in 2015, the United States has applied pressure on countries with trade practices that involve making significant profits with the U.S. or intervening in currency stability beyond a certain threshold. The macroeconomic and exchange rate policies of the top 20 trading partners are assessed semi-annually, and if they meet certain criteria, those countries are designated as either watchlist countries or subject to in-depth analysis.
Countries are assessed using three criteria: maintaining a trade surplus with the United States of US$15 billion or more, achieving a current account surplus equal to or greater than 3 percent of its Gross Domestic Product (GDP), and engaging in a net purchase of the U.S. dollar during currency defense efforts by the foreign exchange authorities that is equal to or greater than 2 percent of its GDP for at least 8 months out of the last 12. If a country meets two of these criteria, it is designated as a watchlist country, and if it fulfills all three, it becomes subject to in-depth analysis.
South Korea has been on the watchlist for 13 consecutive times over the past 7 years by meeting two out of the three criteria. However, due to worsening trade conditions since the second half of last year, the current account surplus has registered at 0.5 percent of GDP for two consecutive terms, leading to South Korea’s removal from the list for the first time. With the rapid depreciation of the Korean won against the strong U.S. dollar, the foreign exchange authorities found fewer reasons to purchase dollars, leading to a lower assessment of their involvement in the foreign exchange market. This also contributed to South Korea’s removal from the watchlist.
In response to the depreciation of the Korean won this year, the foreign exchange actively sold dollars to defend the exchange rate. According to the Bank of Korea, approximately US$2.1 billion was spent to prevent the decline of the Korean won in the first quarter of this year. However, the amount substantially increased to US$5.97 billion in the second quarter, reflecting a more significant intervention.
On that day, the Ministry of Economy and Finance and the Bank of Korea introduced improvement measures to establish market order in preparation for the opening of the foreign exchange market. The foreign exchange authorities have decided to extend the trading hours of the foreign exchange market from 3:30 p.m. to 2 a.m. the following day starting from July next year. During the extended hours, domestic banks will also be allowed to engage in offshore non-deliverable forward electronic transactions.