US keeps an eye on Seoul

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

The US treasury department designates a country a manipulator of foreign exchange if it satisfies all of these three criteria: a trade surplus against the US larger than $20bn a year; a current account surplus that exceeds 3% of its gross domestic product (GDP); and repeated net purchases of foreign currency that amount to more than 2% 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 last Friday estimated that last year, Korea registered a $28.3bn trade surplus with the US and a current account surplus amounting to 7.7% 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% of its GDP last year.

It noted that the Korean authorities sold an estimated $26bn in foreign exchange between the second half of last year and March this year to resist the depreciation of the Korean won, its currency.

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 US 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 foreignexchange operations.

Washington’s tightened monitoring could impose serious constraints on Korea’s foreignexchange 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 US Federal Reserve’s move to raise its benchmark interest rate, put strong downward pressure on its domestic currency.

But the direction of capital flows can be reversed. 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. Seoul, May 2.