Photographer: SeongJoon Cho/Bloomberg

South Korea May Be Named Currency Manipulator, Think Tanks Warn

  • Korea could be labeled as such if Treasury changes criteria
  • Authorities in Korea say intervention is limited to smoothing

As Donald Trump prepares to be sworn in as U.S. president, state-run think tanks in South Korea are raising the possibility of the country being labeled a currency manipulator along with China.  

Korea was listed in the U.S. Treasury Department’s currency watch list in October, along with China, Japan, Germany, Taiwan, and Switzerland, for meeting two of the three criteria used to monitor currency practices. There’s concern in Seoul that the U.S. may adjust the criteria so Trump can make good on his pledge to brand China a currency manipulator within 100 days of taking office, and that changes could also apply to South Korea.

While Trump’s focus with Korea has been more on the free trade agreement with the U.S. and how it has affected his country’s trade deficit, the Korea Institute for International Economic Policy warned in a Jan. 4 report that changes to the criteria would bring a “high possibility” of Korea being tagged a manipulator. The think tank also noted that the U.S. may target smaller economies like Taiwan and Korea before China.

See here for analysis of Korean FX reserves for signs of possible intervention

The Institute of Foreign Affairs and National Security, run by the foreign ministry, also warned last month of the possibility of Korea being labeled a manipulator in the first half of 2017. It said the government should focus on persuading U.S. officials that Korea’s export competitiveness is not maintained via the exchange rate.

Finance Minister Yoo Il-ho told reporters over the weekend that he doesn’t think the nation will be named a manipulator, citing the current criteria. He added that he’s aware of concerns that the U.S. targeting China may result in Korea being bundled into the manipulator label.

Of the three criteria laid out by the U.S. Treasury to determine if currency practices are unfair, Korea matched two in the October report: an economy having a significant bilateral trade surplus with the U.S. and a material current account surplus. China matched one. The other criteria is engaging in persistent, one-sided intervention in the currency market.

Korean authorities have repeatedly said that they only perform “smoothing operations” when volatility in the currency markets is high, and that they don’t target a specific direction or level. Korea’s trade surplus with the U.S. was more than $23 billion in 2016, and its current-account surplus is expected to amount to $97 billion in 2016, close to seven percent of gross domestic product.

The latest official verbal intervention by Korea’s finance ministry and central bank was in February 2016, aimed at easing rapid won weakness to beyond 1,220 per dollar. The won has weakened for the last three straight years. It appreciated in 2013 and 2012.

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