Korea is expected to face a conflict of interest with the U.S. over foreign exchange policies as the world’s largest economy has urged Asia’s fourth-largest economy to refrain from market intervention.

The U.S. last week called for Korea to maintain a transparent foreign exchange market and reduce its reliance on exports amid the Korean government’s toughened stance against the won’s excessive gain against the dollar.

The U.S. also said that it would “press” its Korean partners not to control the pace of the won, unless for financial stability, as it sees that the won is still undervalued by around 2 to 8 percent.

“We will continue to encourage Korean authorities to limit foreign exchange intervention to the exceptional circumstances of disorderly market conditions,” the U.S. Department of Treasury said in a report presented to Congress on International Economic and Exchange Rate Policies on Oct. 30, 2013.

“We are concerned at reports Korea is intervening in the market to resist appreciation in the context of a large and widening current account surplus.”

The report suggested that Korea should follow the international norm of disclosing its forex intervention like other emerging economies such as Brazil, India and Russia, as well as developed economies such as Japan.

It also said the country should commit to the G20 declaration stating that economies should refrain from “competitive devaluation and resolving not to target its exchange rate for competitive purposes.”

Its macro-prudential measures should not be implemented to tame capital inflow as a means to boost the won-dollar exchange, but only to maintain market stability, it said.

The Ministry of Strategy and Finance has not yet issued its official response to the U.S. Treasury report.

But market analysts expect that Korea will remain steadfast in its determination to prevent the exchange rate from falling below the 1,000 won threshold, as a strong won would hurt Korean exports, which make up about 60 percent of its annual growth.

Deputy Prime Minister and Finance Minister Hyun Oh-seok told National Assembly lawmakers during a state audit that the government is closely monitoring the forex market, and would implement measures to buffer the won.
The finance minister indicated that it would look at all options including strengthening its macro-prudential measures to slow the won’s appreciation.

Last week, the Bank of Korea and the Finance Ministry jointly intervened for the first time in five years to prevent the won-dollar rate from further sliding amid increased foreign capital inflow.

By Park Hyong-ki (hkp@heraldcorp.com)