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Korea Pushes Back Against U.S. Over Currency, Sees China Risk

(Bloomberg) -- South Korea pushed back against U.S. pressure over its foreign exchange policy and current account surplus, with the central bank governor maintaining that the nation only acts to check extreme swings in the won.

"I don’t think there is a large possibility of Korea being named a currency manipulator by the Treasury, although there is a possibility the U.S. may change its currency monitoring criteria," Governor Lee Ju-yeol said after the Bank of Korea kept monetary policy unchanged. "The BOK’s stance is that the FX rate should be determined by the market, and authorities only smooth when volatility is extreme."

The comments reflect the concern in the export-dependent country about the intentions of the Trump administration, both with regards to Korea and also its largest trading partner -- China. Korea is already trying to lower its trade surplus with the U.S., yet with about half the economy reliant on exports, any changes will be gradual.

"If China was named a currency manipulator, the yuan may appreciate at first, but will weaken as economic growth slows," Lee said. "Slower growth in China and a weaker yuan could have a negative effect on South Korea’s exports and the economy."

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Read more: Congress Seen Backing Trump Against China on FX

The Korean won has appreciated the most against the yen and dollar this year among Asian currencies tracked by Bloomberg, helping ease the risk of drawing Trump’s ire. It’s advanced about 6 percent, touching 1,138.77 per dollar as of 12:21 p.m. in Seoul. Government bonds fluctuated during the same period, with the yield on five-year bonds rising 11 basis points to 1.9 percent, Korea Exchange prices show.

The currency gains may be partly due to speculation that Korean authorities will minimize intervention ahead of the Treasury’s currency report due in April. Korea was listed on that watch list in October, along with China, Japan, Germany, Taiwan, and Switzerland, because it met two of three criteria used to monitor currency practices.

Governor Lee said the country’s current-account surplus has been due to imports falling on cheap oil and weak domestic demand, and structural factors like aging. That surplus is one of the factors the U.S. considers when compiling the watchlist.

Trade Tantrum: Learn More on How Korea May Ease U.S. Concerns

The BOK board unanimously decided to keep the policy interest rate at 1.25 percent Thursday, and said the economy will grow at a mid-2 percent range this year. That’s the same as the 2.5 percent projection in January, with consumption likely to fall below forecast but exports and investment doing better. The central bank will keep its accommodative monetary policy stance, according to the statement.

“Overall growth is showing some signs of improvement on the back of a pick-up in exports,” Eugenia Victorino, an economist at Australia & New Zealand Banking Group in Singapore, wrote after the decision. There is still room for further easing by the end of second quarter, she wrote, with domestic demand soft and underlying inflationary pressures still weak.

Homegrown Scandal

The economy looks to be improving, but the political corruption scandal surrounding President Park Geun-hye has now ensnared the heir to Samsung, the nation’s biggest business empire. With the future of Park still unclear, there’s a power vacuum at the top of the country and consumer confidence has slumped to near an eight-year low.

Although policy makers are hesitant to call this an economic recovery, South Korea’s exports are set for a fourth monthly gain in February, and inflation accelerated at the fastest pace since 2012 last month. Governor Lee has previously said the central bank needs to pay more attention to financial stability when domestic and external uncertainties are high and markets are volatile.

Record Debt

South Korea’s household debt soared to a record 1,344.3 trillion won ($1.2 trillion) at the end of 2016, bolstering analysts’ views that the central bank won’t cut rates further for now, as doing so would fuel rising debt.

Financial stability risks will continue to feature prominently in determining the future of monetary policy, given the concerns over still increasing debt and the risk of faster rate hikes by the Federal Reserve, said Woo Jae-joon, a Hong Kong-based economist for Bank of America Merrill Lynch.

(Updates with more comments from Governor Lee.)

--With assistance from Myungshin Cho

To contact the reporters on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net, Kanga Kong in Seoul at kkong50@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, James Mayger

©2017 Bloomberg L.P.