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[Editorial] Constraints on FX policy

Washington puts Korea on ‘monitoring list’

Korea has avoided being designated as a “currency manipulator” by the United States, but the government needs to be more cautious in undertaking foreign exchange operations, as Washington has put the nation on its “monitoring list” along with China, Japan, Germany and Taiwan.

The U.S. Treasury Department designates a country as a manipulator of foreign exchange if it satisfies all of the following three criteria: A trade surplus against the U.S. larger than $20 billion a year; a current account surplus that exceeds 3 percent of its gross domestic product; and repeated net purchases of foreign currency that amount to more than 2 percent of its GDP over the year.

Korea was put on the monitoring list because it met the first two criteria. The department’s report released Friday estimated that last year, Korea registered a $28.3 billion trade surplus against the U.S. and a current account surplus amounting to 7.7 percent of its GDP.

Yet Korea did not meet the third criterion. The report found that Korea’s net purchases of foreign exchange amounted to a mere 0.2 percent of its GDP in 2015.

It noted that the Korean authorities sold an estimated $26 billion in foreign exchange between the second half of 2015 and March 2016 to resist depreciation of the Korean won.

It is a good thing that Korea avoided being branded a currency manipulator. There have been concerns that Korea might be determined to have engaged in unfair currency practices, given its large trade surplus against the U.S. and consistent current account surpluses.

A country designated as a currency manipulator will have to appreciate its currency and reduce external surpluses, or face severe penalties from Washington, including exclusion from U.S. government procurement and heightened surveillance by the International Monetary Fund.

Korean officials in charge of currency policy can now heave a sigh of relief. But they should not throw caution to the wind, as Washington will closely monitor and assess the economic trends and foreign exchange policies of the five countries put on the monitoring list.

The U.S. Treasury Department has already urged Korea to limit its foreign exchange intervention only to circumstances of disorderly market conditions and to increase the transparency of its foreign exchange operations.

Washington’s tightened monitoring could impose serious constraints on Korea’s foreign exchange operations.

Korea has sold a large amount of foreign exchange since the second half of last year because large capital outflows, triggered by a surging dollar following the U.S. Federal Reserve’s move to raise its benchmark interest rate, put strong downward pressure on its currency.

But the direction of capital flows can be reversed. If foreign investors who took their money out of Korea in recent months come back for some reason, there would be capital inflows.

If foreign capital comes in steadily over a prolonged period of time, the Korean won would face sustained upward pressure, necessitating repeated interventions by the currency authorities to resist appreciation.

But even in such a situation, the Korean government would have to take Washington’s tightened monitoring into consideration in conducting foreign exchange operations.

The new U.S. foreign currency policy toward its trading partners is overly restrictive. But softening it is obviously beyond the ability of Korean policymakers. What they should do now is to figure out how to respond to it.
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