Korea removed from U.S. currency manipulation watchlist

US Treasury Secretary Janet Yellen [Photo by EPA / Yonhap]

South Korea was removed from a currency manipulating watchlist by the U.S. government for the first time.

According to the U.S. Department of the Treasury’s semi-annual currency report for the second half of 2023, released on Tuesday, Korea was removed from the currency watchlist along with Switzerland, while Vietnam was placed back onto the monitoring list. Other countries to watch included China and Germany, according to the report.

This is the first time Korea has been taken off the watchlist since the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA) took effect in February 2016. Korea met two out of three criteria and had remained on the watchlist for 13 consecutive evaluations for the past seven years. However, the downturn in trade performance in the second half of 2022 led to two consecutive current account surpluses exceeding 0.5 percent of the nation’s GDP, resulting in the country’s removal from the watchlist.

The decrease in the won’s value against the strong dollar also contributed to the removal as Korea reduced the need for foreign exchange market intervention. Foreign exchange authorities have been actively selling dollars to prevent the won’s depreciation in 2023. According to the Bank of Korea, $2.1 billion was spent in the first quarter to curb the decline in the won’s value, and $5.97 billion in the second quarter of 2023.

“We believe that the latest U.S. treasury report has recognized the transparency of Korea’s foreign exchange policies and market-led currency rates,” an official from the Ministry of Economy and Finance said.

The U.S. government has been using the TFTEA as a tool to monitor its partners who trade substantially with the United States and intervene in currency stability beyond a certain threshold. The United States previously monitored other countries for intervention in foreign currencies under a trade law enacted in 1988, but the monitoring became more systematic with specific criteria with TFTEA.

The U.S. Treasury evaluates the macroeconomic and exchange rate policies of its top 20 trading partners biannually, when it designates them as either a watchlist country or a country under in-depth analysis if certain criteria are met, which include a trade surplus with the U.S. of over $15 billion, a current account surplus of over 3 percent of its gross domestic production (GDP), foreign exchange authorities’ net purchases of dollars in defense of the currency rate exceeding 2 percent of their GDP, and engagement in such interventions for eight or more months over the last 12 months. Any country that meets two of the criteria is put on the watchlist, and a country meeting all three faces in-depth analysis.

While being placed on the watchlist does not entail specific sanctions, designation as a currency manipulator can restrict U.S. corporate investments, making U.S. trade partners under the Treasury Department’s evaluation attentive to U.S. oversight when implementing their foreign exchange policies.

Meanwhile, the finance ministry and the Bank of Korea presented improvement measures to restore market order in preparation for the opening of the foreign exchange market on Wednesday. The foreign exchange authorities decided to allow domestic banks to engage in electronic offshore non-deliverable forward (NDF) currency exchange transactions during the extended hours following the extended foreign currency market trading hours, to 2 a.m. the next morning, from the current 3:30 p.m.