As South Korea and the United States wrapped up a currency agreement aimed at increasing transparency in foreign exchange policy, attention is focusing on how the outcome will affect the market. Some expect that uncertainty related to foreign exchange will be partially resolved and the exchange rate will stabilize. Others, however, project that exchange rate instability will continue until the tariff negotiations are concluded.
◇ Sharing market intervention details with the U.S. every month… avoided currency manipulator risk
On the 1st, the Ministry of Economy and Finance and the U.S. Treasury reaffirmed the basic principle of foreign exchange policy that they will not manipulate the value of their own currency for the purpose of undermining effective balance of payments adjustment or gaining an unfair competitive advantage. In addition, the two countries' financial authorities agreed to pursue a transparent foreign exchange policy to monitor foreign exchange market conditions and stability and to strengthen mutual communication.
In this agreement process, the Ministry of Economy and Finance agreed to share with the U.S. Treasury, on a nonpublic basis, the monthly details of market stabilization measures that are currently disclosed quarterly, and to disclose monthly foreign exchange reserves and forward position information in accordance with the International Monetary Fund (IMF) format. It also decided to publicly release the annual currency composition of foreign exchange reserves. Currently, it is disclosed only by distinguishing between currencies included in the IMF special drawing rights (SDR) basket and those not included, but going forward, the composition by individual currency will be disclosed.
The Ministry of Economy and Finance assessed that this agreement reduced the risk of Korea being designated a currency manipulator. Each June and November, the United States issues a report evaluating the foreign exchange policies of major trading partners, including South Korea, to determine whether there is currency manipulation. In the June report, it said it would incorporate qualitative indicators into the assessment in addition to existing quantitative indicators, and the ministry explained that the contents of this agreement are similar to those qualitative indicators included in the report, lowering uncertainty related to a manipulator designation. South Korea is currently designated as being on the monitoring list, one step below a manipulator.
A Ministry of Economy and Finance official said, "This consultation confirmed that we would also comply with the qualitative requirements that the United States said it would use as a standard," adding, "If we implement the agreed contents, it means the likelihood of being designated a currency manipulator (where qualitative assessment applies) is low."
This is expected to reduce uncertainty in the foreign exchange market and contribute to exchange rate stability. Previously, immediately after the Trump administration in its first term designated China a currency manipulator in Aug. 2019, the dollar-yuan rate surged past 7.1 yuan and hit a new high for the year. If the likelihood of a manipulator designation declines, upward pressure on the exchange rate will ease, which could lead in the short term to capital inflows and reduced volatility.
◇ Tariff talks matter more than currency talks… "Funding plan for U.S. investment is key"
There is also a view that the outcome of the currency talks will be hard to have a major impact on the foreign exchange market over the long term. That is because the funding plan for the $35 billion U.S.-bound investment funds that is driving the current uptrend in the exchange rate has not been finalized. The U.S. government is demanding the entire amount be funded in cash, while South Korea has expressed reluctance, citing reasons such as the potential for a foreign exchange crisis.
Cho Yong-gu, a Shinyoung Securities researcher, said, "Right now, the foreign exchange market is more heavily influenced by factors related to U.S.-bound investment, so the effect of the currency talks is limited," adding, "Until the tariff talks are wrapped up, the exchange rate will stay around 1,400 won." Moon Hong-cheol, a DB Financial Investment researcher, also said, "Market attention is focused on the tariff talks, so the currency talks do not appear to be a meaningful card."
It is also noted that the currency agreement was reached at a level similar to countries such as Japan, which concluded talks with the United States earlier, leaving little difference from what the market expected. On the 12th, Japan also reaffirmed through a currency agreement the principle that it would not manipulate the value of its own currency and would intervene in the foreign exchange market only to curb excessive volatility or disorderly movements. The transparency-enhancing measures taken by Japan's Ministry of Finance are similar to the Ministry of Economy and Finance's announcement. Switzerland also reached an agreement with the United States in a similar manner.
Park Sang-hyun, an iM Securities researcher, said, "(The contents of the currency agreement) were largely anticipated by the market," noting, "The contents themselves are not enough to have a significant spillover effect on the foreign exchange market." He added, "It is positive that South Korea's likelihood of being designated a currency manipulator is decreasing, but it will not be enough to significantly change the trend of the foreign exchange market."