US removes Korea from ‘exchange rate observation list’ for first time in 7 years-Let’s find out why.

The U.S. government has removed South Korea from its ‘currency watch list’ for the first time in over seven years. The move, which comes amidst high currency volatility, is expected to increase the South Korean government’s capacity to manage its exchange rates.

On the 6th (local time), the U.S. Department of Treasury removed South Korea and Switzerland from the watch list in its ‘Macroeconomic and Foreign Exchange Policies of Major Trading Partners’ report submitted to Congress. South Korea was removed from the list because it met only one of the three criteria (a trade surplus of $38 billion) in the Treasury Department’s recent two rounds of monitoring.

South Korea had been designated as a currency watch list country from April 2016 until this past June. Except for the first half of 2019 (when only one criterion was met), South Korea had been classified as a watch list country due to its trade surplus with the U.S. and its current account surplus.

Under the Trade Facilitation and Trade Enforcement Act of 2015, the U.S. evaluates the macroeconomic and foreign exchange policies of the top 20 trading countries semi-annually. If certain criteria are met, countries are designated as ‘deeply analyzed countries’ or ‘watch list countries’.

Specifically, if a country meets two of the three conditions – a trade balance (a trade surplus of more than $15 billion with the U.S.), a current account balance (a current account surplus exceeding 3% of GDP), and foreign exchange market intervention (net dollar purchases exceeding 2% of GDP for eight months out of 12) – it is classified as a watch list country. If all three conditions are met, it becomes a deeply analyzed country.

The Treasury Department classified Vietnam, China, Germany, Malaysia, Singapore, and Taiwan as currency watch list countries. Among these, China, Germany, Malaysia, Singapore, and Taiwan remained on the watch list for the second half of this year, following the first half. Vietnam was re-designated as a watch list country for the first time since the end of 2020 under the Donald Trump administration. This was due to a sharp increase in Vietnam’s current account surplus to 4.7% of GDP, following the shift of global companies’ production bases from China to Southeast Asia as part of the decoupling trend after the COVID-19 pandemic.

No countries were designated as ‘currency manipulators’ in this report. The U.S. Treasury Department stated, “There were no countries confirmed to have manipulated their exchange rates for four quarters until the end of June.” It further evaluated, “During this period, Singapore and China, two trading nations that recorded current account surpluses, did buy foreign currencies net, but not for the purpose of gaining an unfair competitive advantage in international trade.”

However, the report pointed out that China’s yuan is being closely monitored due to its lack of transparency in foreign exchange market intervention. The report stated, “China does not disclose its foreign exchange market intervention, and there is a lack of transparency in its exchange rate mechanism,” and conveyed that “close monitoring of China will continue.”

The Ministry of Strategy and Finance in South Korea assessed that the direct impact on the Korean economy would not be significant as it was due to changes in macroeconomic indicators such as the current account. However, it analyzed that the government’s operation of foreign exchange policy would become more manageable as the exchange rate volatility has increased recently due to external fluctuations.

An Seong-bae, director of the International Macroeconomic Finance Division at the Korea Institute for International Economic Policy (KIEP), said, “The significance lies in the fact that we are further away from the risk of being designated as a currency manipulator, as the watch list country is literally just a country under observation, so there was no pressure from the U.S. on Korea.” He continued, “While the reduction in the current account surplus played a large role, it can be interpreted as a result of the government’s continuous measures for transparency in the foreign exchange market.” Director An further added, “We have reduced the risk in a period of rapid exchange rate changes,” and “The government has secured the capacity to implement foreign exchange policy in the face of sudden exchange rate changes.”

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