The US Treasury Department maintained South Korea on its currency monitoring list on the 23rd (local time), alongside nine other countries including China, Japan, Taiwan, Thailand, Singapore, Vietnam, Germany, Ireland, and Switzerland. Korea met two of the Treasury's three evaluation criteria: a current account surplus exceeding 3% of GDP and a bilateral trade surplus with the US exceeding $15 billion. The Treasury noted that despite Korea's large and persistent external surpluses, the won faced continuous depreciation pressure during the evaluation period covering the 12 months through December of last year. The semi-annual report to Congress monitors major trading partners' macroeconomic and exchange rate policies to identify countries that intervene in foreign exchange markets to gain trade advantages.
Treasury Assesses Won Depreciation Pressure Despite Korea's External Surpluses
The Treasury stated that Korea's current account surplus expanded further during the year supported by technology exports, while the bilateral trade surplus with the US decreased slightly. The report analyzed that "despite these large and persistent external surpluses, the won faced continuous depreciation pressure." The Treasury diagnosed that authorities intervened in the foreign exchange market through net selling during the reporting period, particularly in the latter half of the year.
The won appreciated 2.3% against the US dollar during the year but depreciated 5.3% on a real effective exchange rate (REER) basis. The Treasury explained that most of the won's appreciation against the dollar occurred in the final trading days, rising 2.6% from 1,481 won per dollar on December 23 to 1,445 won on December 31. The report noted that "reports emerged of large-scale foreign exchange market intervention by authorities" during this period. The Treasury referenced its statement from last month that "recent won depreciation pressure is inconsistent with Korea's solid economic fundamentals, and excessive volatility in foreign exchange markets is undesirable."
Korea Conducted $28 Billion Net Dollar Selling During Evaluation Period
According to the Treasury, Korea conducted net dollar selling of $28 billion during the year, with $22.5 billion occurring in the fourth quarter alone. However, the Bank of Korea responded to won weakness using forward foreign exchange transactions. The BOK's net forward purchase position increased from $17 billion in December 2024 to $31 billion in May of last year, then was mostly unwound over the remaining seven months. By December of last year, only $1.3 billion remained in the BOK's net forward purchase position.
The Treasury speculated that "this may be because authorities preferred to maintain the level of total foreign exchange reserves." This suggests authorities may have utilized forward transactions to maintain total foreign exchange reserve levels. Korea's total foreign exchange reserves increased slightly from $392 billion at the end of 2024 to $403 billion at the end of last year.
Treasury Praises Korea's Foreign Exchange Market Liberalization Efforts
Regarding Korea's foreign exchange market liberalization policies, the Treasury stated that "progress is being made in easing restrictions on foreign investor participation, which is expected to help domestic foreign exchange market liquidity and price discovery in the medium term." This represents a positive assessment of Korea's efforts to advance its foreign exchange market.
National Pension Service Foreign Currency Purchases Draw Treasury Attention
The Treasury explained that the National Pension Service (NPS) continued to purchase foreign currency to meet its overseas asset diversification targets. The report also noted increased attention to NPS hedging practices. The Treasury stated that Korea has government investment entities including NPS and the Korea Investment Corporation (KIC), analyzing that "in addition to utilizing swap lines with the BOK to ease won depreciation pressure during this reporting period, they may have sold foreign currency assets."
The report introduced that BOK Governor Lee Chang-yong stated NPS needs to adopt greater "strategic ambiguity" to enhance the effectiveness of the exchange rate management framework.
Regarding Japan, the Treasury announced it "will continue close consultations with Japan's Ministry of Finance on macroeconomic and foreign exchange-related matters," adding that "while global factors such as financial market volatility and oil prices may have affected the yen, excessive volatility in the yen is undesirable."
FAQ
What criteria did South Korea meet for the US Treasury's currency monitoring list?
South Korea met two of the Treasury's three evaluation criteria: a current account surplus exceeding 3% of GDP and a bilateral trade surplus with the US exceeding $15 billion. The third criterion—net dollar purchases exceeding 2% of GDP for 8 out of 12 months—was not met, as Korea conducted net dollar selling of $28 billion during the evaluation period.
How did the won perform during the Treasury's evaluation period?
The won appreciated 2.3% against the US dollar during the year but depreciated 5.3% on a real effective exchange rate (REER) basis. Most of the won's appreciation against the dollar occurred in the final trading days, rising 2.6% from 1,481 won per dollar on December 23 to 1,445 won on December 31, with reports of large-scale intervention by authorities during this period.
What did the US Treasury say about Korea's foreign exchange market reforms?
The Treasury stated that Korea is making progress in easing restrictions on foreign investor participation, which is expected to help domestic foreign exchange market liquidity and price discovery in the medium term. This represents a positive assessment of Korea's foreign exchange market liberalization efforts.
