The Bank of Korea announced on March 29 that South Korea net-sold approximately US$187 million in the global forex market in the second half of 2018. This is the first time that South Korea disclosed its forex market intervention history.
“Foreign governments have claimed that South Korea takes measures for a weak won and an increase in exports and the South Korean government has said in response that it intervenes in the market on a two-way basis not for exchange rate manipulation but for volatility reduction,” the Bank of Korea explained, adding, “The announcement will help remove the misunderstanding.”
Last year, the volatility of the won-dollar exchange rate was 0.37 percent, much lower than those of the Mexican peso-U.S. dollar exchange rate (0.64 percent), the Russian ruble-U.S. dollar exchange rate (0.63 percent) and the Brazilian real-U.S. dollar exchange rate (0.73 percent). The volatility was close to those of euro (0.36 percent) and yen (0.34 percent) and stood at 0.36 percent in the second half of 2018. “The relatively small size of the net sale is because the won-dollar rate showed a stable movement last year,” the Bank of Korea mentioned.
The announcement is likely to result in a lower possibility of South Korea’s designation as a currency manipulator in the U.S. Treasury Department’s report scheduled to be released next month. At present, South Korea is on the department’s pre-currency manipulator designation monitoring list, satisfying two out of three conditions as of last month. One is a trade surplus with the United States of more than US$20 billion and the other is a current account surplus-to-GDP ratio of more than 3 percent.
South Korea could avoid the designation by not satisfying the rest, that is, one-way forex market intervention defined as a net purchase-to-GDP ratio of more than 2 percent. However, the Department of the Treasury put pressure in its October 2018 report, claiming that South Korea increased its dollar purchase in November 2017 and January 2018 in order to prevent a fall in the won-dollar rate.
The United States is unlikely to immediately exclude South Korea from the monitoring list next month. This is because the department makes it a rule not to exclude any country on the list within one year. Experts point out that the United States will keep putting pressure for won appreciation although South Korea’s label as a currency manipulator will be removed.
The Bank of Korea’s second disclosure of its forex market intervention history is scheduled for the end of September this year. The relevant period is the first half of this year. The subsequent disclosures will be on a quarterly basis with a delay of three months.