Photographer: SeongJoon Cho/Bloomberg

Jawboning the Won: Decoding Comments by Korean Policy Makers

  • Stronger currency cuts into profits of South Korean exporters
  • But officials are wary of overstepping the mark with Trump

As South Korea’s won trades near multi-year highs amid steady economic growth and easing geopolitical tensions, policy makers in Seoul have stepped up their commentary on foreign exchange.

The won appreciated 13 percent against the dollar in 2017 and reached more than a three-year high earlier this month, curbing earnings at exporters including Samsung Electronics Co. But both analysts and traders point to a change in Seoul’s response to the unwanted moves in the currency, with policy makers more restrained in their comments than in the past and less large-scale intervention in the market. 

The threat of being labeled a currency manipulator by the U.S. Treasury as President Donald Trump seeks to curb his country’s trade deficit appears to be having an effect. And many economists also see the won’s strength as natural given Korea’s strong exports and current-account surplus, leaving authorities less justification to intervene.

Following is a guide to some of the gradations of language that officials may use when speaking about the won. They typically comment when pressed with questions at public events, or when called by reporters about the currency. These cases are less formal than a full-blown verbal intervention, when the central bank and finance ministry issue a joint statement on the currency. The most recent case of this was in February 2016.

General Stance

  • The general stance of policy makers is that "the exchange rate is determined by the market, but steps can be taken if there is too much volatility." On its own, the statement doesn’t necessarily carry a lot of weight. But it is used as a caution to traders when they may be prone to react sharply to events, such as an interest rate hike by the Federal Reserve. Bank of Korea Governor Lee Ju-yeol repeated the message in November at a briefing after the BOK raised borrowing costs.

Closely Monitoring

  • The next level of concern is typically when officials say they are “closely monitoring” the market, though this shouldn’t be seen as a signal of imminent action.

Fast Moves

  • Policy makers warning that the pace of movement in the won is fast, or excessive, can suggest they are worried that trading isn’t in line with regional currencies, or doesn’t reflect economic fundamentals. 

Take Steps

  • Officials may say they can take steps or action to stabilize markets when the currency approaches a key level or is showing rapid movement. This can indicate that authorities are ready to go into the market at any time, but they will never confirm intervention and maintain that it is always limited to "smoothing operations." Governor Lee and Finance Minister Kim Dong-yeon said on Jan. 4 they could take action if there are excessive one-sided moves in the won.

Stern, Swift

  • A pledge of stern or swift action shows a higher level of determination by officials to influence the won. The comment was made when the won breached a key level of 1,060 on Jan. 8, and traders speculated authorities purchased the dollar to push up the dollar-won rate.

Jeon Seungji, a currency analyst at Samsung Futures Inc., said Korean authorities are taking the softest approach she’s seen in more than a decade of watching the won. They’ll probably remain cautious while the Trump administration stays alert on the issue, according to Jeon.

But with the importance of exports, officials in Seoul will remain mindful of the cost of excessive strength in the currency, said Trinh Nguyen, a senior economist for Natixis Asia Ltd.

“We do not expect the Korean won to repeat the same stellar performance this year, mainly due to the BOK’s more vigilant stance,” she said.

— With assistance by Kyung-Jin Kim

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