Controversy Brewing over Currency Agreement

The Office of the United States Trade Representative (USTR) announced on March 28 that the South Korean and U.S. governments recently reached a currency agreement and currency devaluation and exchange rate manipulation by the South Korean government are prohibited according to the agreement. The South Korean government denied the presence of the agreement.

In its Fact Sheet released by the USTR that day, the office clarified that a memorandum of understanding including provisions to prohibit competitive devaluation and exchange rate manipulation is in the making between the two governments. The South Korean government said in response that the issue has nothing to do with the recent negotiations for KORUS FTA revision and the U.S. government caused significant misunderstanding in announcing the result of the negotiations. “Exchange rate is a multilateral issue that cannot be handled in bilateral negotiations,” it went on to say, adding, “The U.S. government tried to link foreign exchange with KORUS FTA revision from earlier this year, but the South Korean government refused to do so until the end.”

“The remarks of the USTR, the Treasury Department and the White House are slightly different from one another, but what can be said for sure is that exchange rate is not linked to the KORUS FTA,” the Ministry of Strategy and Finance explained, continuing, “The U.S. government mentioned the forex issue in the early stage of the negotiations, but we refused to handle the issue during the negotiations.”

Still, the ministry said that the South Korean government is currently discussing forex market transparency enhancement with the U.S. government. “This matter has been mentioned for years and both governments have discussed it each year,” it said, adding, “The South Korean government is considering disclosing its forex market intervention history with some interval in the interest of transparency although every detail about it has yet to be determined.” The ministry also mentioned that South Korea is the only OECD member country and almost the only G20 member country that is currently not doing so.

Despite the denial, market participants are expressing concerns over the possibility that the South Korean government would tolerate a strong won. According to the Hyundai Research Institute, South Korea’s total exports fall 0.51% every time the won-dollar exchange rate falls 1%.