🚨 Exchange Rate Transparency Pressure and Challenges for Korean Foreign Exchange Policy
Today Korean Economic News | 2025.05.17
📌 US Demands for Foreign Exchange Intervention Disclosure Puts Pressure on Korea's Exchange Rate Policy
💬 The United States is considering requesting monthly disclosure of foreign exchange market intervention details from major trading partners including Korea, increasing external pressure on Korea's exchange rate policy. The Korean government has drawn a line saying "there will be no second Plaza Accord," but the US is expected to continue its demands in the name of strengthening foreign exchange market transparency. Experts advise that Korea needs to prepare long-term countermeasures as the US will likely continue to pressure trading partners to reduce its trade deficit.
1️⃣ Easy Understanding
The US is asking Korea to share more information about its foreign exchange policy, creating a new challenge for our economy. Let me explain this situation simply.
The US government is considering asking Korea and other major trading partners to disclose detailed information about their foreign exchange market interventions every month. Currently, Korea only reveals general information about changes in foreign exchange reserves quarterly, so meeting the US demand would require sharing much more detailed information more frequently.
The background of this request is the US trade deficit problem. The Trump administration is closely monitoring the exchange rate policies of major trading partners to reduce its trade deficit. They particularly believe that Korea is artificially keeping the won value low to boost export competitiveness.
Simply put, when the won value is low, Korean products become cheaper in dollar terms and can sell more in the US. Conversely, American products become more expensive in Korea, leading to fewer imports. This situation contributes to America's trade deficit with Korea.
Our government maintains that "exchange rates are determined by market principles, and we only manage extreme volatility." They also emphasize that "there will be no second Plaza Accord." The Plaza Accord was an event in 1985 when the US forced Japan and Germany to adjust their exchange rates, causing the yen and mark to surge and creating a major shock to these economies.
However, the US is likely to continue pressuring Korea under the banner of 'transparency.' In response, our government and businesses need to focus on managing exchange rate volatility risks while working to improve our economic structure to be less dependent on exchange rates.
In the end, the demand for exchange rate policy transparency goes beyond a simple information disclosure issue and could impact Korea's export-dependent economic structure and its overall trade relationship with the US.
2️⃣ Economic Terms
📕 Exchange Rate
The exchange rate is the ratio at which one country's currency is exchanged for another.
- If the won/dollar exchange rate is 1,350 won, it means 1,350 won is needed to get 1 dollar.
- When the exchange rate rises (won value falls), it benefits exports, and when it falls (won value rises), it benefits imports.
📕 Foreign Exchange Market Intervention
Foreign exchange market intervention is when a central bank or government buys or sells its own currency in the market to influence exchange rates.
- To prevent the won value from falling, the government sells dollars from foreign exchange reserves and buys won.
- To prevent the won value from rising, it sells won and buys dollars.
📕 Plaza Accord
The Plaza Accord was an agreement made in September 1985 at the Plaza Hotel in New York between the US, Japan, Germany, France, and the UK to adjust exchange rates.
- They agreed to artificially lower the dollar value to reduce US trade deficits.
- This caused the Japanese yen to surge, creating a major shock to Japan's economy and contributing to its "Lost Decade."
📕 Exchange Rate Volatility
Exchange rate volatility refers to how frequently and significantly exchange rates change.
- High volatility means unpredictable exchange rate changes, increasing uncertainty for companies' export and import activities.
- Most central banks intervene in foreign exchange markets to moderate extreme exchange rate volatility.
3️⃣ Principles and Economic Outlook
💡 Background and Impact of US Exchange Rate Transparency Demands
Let's look at why the US is demanding exchange rate policy transparency from Korea and its impact.
First, reducing the US trade deficit is the core goal. The Trump administration is putting strong pressure on major trading partners to reduce America's trade deficit. With Korea specifically, the US recorded a deficit of about $35 billion last year. The US points to Korea's exchange rate management as one of the causes of this trade imbalance, suggesting that Korea artificially keeps the won value low to boost export competitiveness. The US Treasury Department designates Korea as a "currency watch list country" in its semi-annual exchange rate report, and this demand for disclosure of foreign exchange market intervention details could be used as a more direct pressure tool.
Second, expanding exchange rate information disclosure could constrain Korea's foreign exchange policy. Currently, Korea only discloses quarterly changes in foreign exchange reserves, making it difficult for outside observers to accurately determine actual market interventions and their scale. If monthly or more detailed intervention records are disclosed, Korean monetary authorities would need to be more cautious even when intervening to stabilize markets. Particularly, if foreign exchange market interventions are "transparently" disclosed, the US might use this as grounds for designating Korea as a currency manipulator or imposing additional tariffs. This could significantly limit Korea's foreign exchange policy autonomy.
Third, exchange rate transparency demands are part of reshaping the global trade order. The Trump administration's exchange rate transparency demands are not only targeting Korea but also pressuring major trading partners like China, Japan, and Taiwan. This is an extension of the "America First" protectionist policy, attempting to reshape the global trade order in America's favor. Especially as US-China economic tensions intensify, countries like Korea that are positioned in the middle may face difficult choices under pressure from both sides. These changes in the global economic environment present new challenges for Korea's diplomatic and economic policies.
The US demand for exchange rate transparency is an important issue that goes beyond simple information disclosure and could affect Korea's export-dependent economic structure and overall trade relationship with the US. If exchange rate management becomes restricted, we need to carefully examine its impact on export companies' competitiveness and domestic economic stability.
💡 Korea's Foreign Exchange Policy Status and Response Measures
Let's examine Korea's current foreign exchange policy and how to respond to US pressure.
First, Korea's foreign exchange policy has characteristics of a "managed floating exchange rate system." Officially, Korea has adopted a floating exchange rate system where rates are freely determined in the market. However, in practice, when there are sharp exchange rate fluctuations, the Bank of Korea and Ministry of Finance conduct "smoothing operations" to moderate volatility. This policy has played an important role in preventing shocks from rapid exchange rate changes, especially given Korea's high dependence on exports. Particularly during external shocks like the global financial crisis or COVID-19, active interventions were made to stabilize the foreign exchange market. Currently, Korea's foreign exchange reserves are about $450 billion, maintaining the world's 9th largest level.
Second, in the short term, improving foreign exchange policy transparency and strengthening communication is necessary. To respond to US pressure, a certain level of transparency improvement is inevitable. We need to clarify that the purpose of market intervention is market stability and consider gradually expanding information disclosure about interventions. We also need to strengthen foreign exchange policy communication channels with the US and emphasize the mutually beneficial aspects of bilateral trade and investment relations. Particularly, we should emphasize how Korean direct investment in the US contributes to job creation and persuade them that trade imbalances stem from structural factors, not just exchange rate issues.
Third, in the long term, it's important to improve our economic structure to lower dependence on exchange rates. We need to transition from an export-centered economic structure to one balanced with domestic demand. Through strengthening service industry competitiveness, revitalizing domestic demand, and income-led growth, we need to create an economic structure less sensitive to exchange rate fluctuations. Companies should also strengthen risk management for exchange rate volatility and enhance non-price competitiveness like technology, brand value, and quality to reduce the impact of exchange rate changes. Additionally, diversifying export markets to lower dependence on specific countries is also an important strategy.
While US demands for exchange rate transparency may challenge the autonomy of Korea's foreign exchange policy, they can also be an opportunity to improve our economic structure and seek a more sustainable growth model. If the government and businesses pursue both short-term responses and long-term structural improvements, we can respond more effectively to such external pressures.
💡 Impact on Businesses and Investors and Preparation Measures
Let's look at how exchange rate policy changes affect businesses and investors and how they can prepare.
First, export companies need to manage exchange risk and strengthen non-price competitiveness. If exchange rate transparency is enhanced and government market intervention becomes limited, exchange rate volatility could increase. Export companies should strengthen exchange hedging strategies like forward exchange contracts and currency swaps to manage exchange risks. Small and medium-sized export companies particularly need to actively use the government's exchange risk management support programs. Companies should also strengthen non-price competitiveness such as product technology, quality, design, and brand value to build a business structure less sensitive to exchange rate fluctuations. In the long term, strategies to minimize the impact of exchange rate changes through expanding local production and restructuring global value chains are needed.
Second, investors need diverse asset allocation and investment strategies according to exchange rate fluctuations. Increased exchange rate volatility can be both a new risk and opportunity for investors. Domestic investors can prepare for won depreciation risk by allocating a portion of their portfolio to overseas assets. They should consider diversified investments in safe assets like US Treasury bonds and global ETFs, along with emerging market assets. Strategies to adjust sector investment weights like export stocks, domestic consumption stocks, and raw material-related stocks according to exchange rate forecasts are also effective. Institutional investors need to establish more sophisticated exchange risk management strategies and develop global asset allocation models strong against exchange rate fluctuations.
Third, households need to adjust consumption and saving patterns and improve financial literacy. Increased exchange rate volatility directly affects import prices, overseas travel costs, and study abroad expenses. Households need flexible consumption patterns to adjust the timing of durable goods purchases and overseas travel plans according to exchange rate forecasts. In savings and investments, they should consider diversifying assets across various currencies like won, dollar, and yen. Especially households with long-term financial plans (retirement, education) need to establish financial plans considering exchange rate risk. Above all, improving understanding of basic exchange rate principles and their impact is important for building financial capacity to make rational decisions.
Exchange rate policy changes are important issues affecting all economic players including businesses, investors, and households. If each economic player improves their understanding of exchange rate fluctuations and prepares appropriate countermeasures, they can turn the uncertainty from exchange rate policy changes into opportunities. Especially from a long-term perspective, efforts to lower exchange rate dependence and strengthen fundamental competitiveness are most important.
4️⃣ Conclusion
The US demand for exchange rate transparency presents a new challenge for Korean foreign exchange policy. This goes beyond a simple information disclosure issue and could affect Korea's export-dependent economic structure and overall trade relationship with the US.
Under the goal of reducing trade deficits, the US is closely monitoring the exchange rate policies of major trading partners, and the demand for monthly disclosure of foreign exchange market intervention details is part of this pressure. The government has drawn a line saying "there will be no second Plaza Accord," but the US is likely to continue its demands under the banner of 'transparency.'
To respond to this, we need to appropriately improve foreign exchange policy transparency in the short term while strengthening communication channels with the US and emphasizing the mutually beneficial aspects of bilateral trade and investment relations. Particularly, we need to make efforts to persuade them that trade imbalances stem from structural factors, not just exchange rate issues.
In the long term, we need to create an economic structure less sensitive to exchange rate fluctuations through transitioning from an export-centered economy to one balanced with domestic demand, strengthening service industry competitiveness, and enhancing companies' non-price competitiveness. Diversifying export markets to lower dependence on specific countries is also an important strategy.
Businesses and investors should prepare for exchange rate policy changes through strengthening exchange risk management, diversifying asset allocation, and establishing investment strategies according to exchange rate fluctuations. Households also need to respond to the impact of exchange rate fluctuations by adjusting consumption and saving patterns and improving financial literacy.
In the end, while the demand for exchange rate policy transparency may be a short-term burden on the Korean economy, it can also be an opportunity to improve our economic structure and seek a more sustainable growth model in the long term. If all economic players including the government, businesses, and households prepare for increased exchange rate volatility while continuing efforts to enhance fundamental competitiveness, our economy will become more robust despite such external pressures.