Background of Designating Currency Manipulation Watch List Countries and Analysis of Lee Jae-myung Administration's Foreign Exchange Policy Response

Introduction

On June 5, 2025, the U.S. Treasury designated South Korea once again as a 'Monitoring List' country for currency. This action comes approximately a year and a half after the designation made at the end of 2023, indicating that a new element of tension in Korea-U.S. economic diplomacy has emerged both temporally and contextually. Although this designation does not carry direct sanctions, its implications are significant as it serves as a lever that the U.S. can use in trade negotiations. Therefore, how the Lee Jae-myung administration interprets this issue and what strategic responses it seeks will be an important test of the credibility and direction of future diplomacy with the United States.

Background and Criteria for Designating Currency Monitoring Countries

The United States issues a 'Foreign Exchange Report' twice a year, assessing the foreign exchange policies of major trading partners. In the mid-2025 report, South Korea was reclassified as a monitored country by meeting the following two criteria: - Trade surplus with the U.S.: Approximately $55 billion as of 2024, significantly exceeding the threshold of $15 billion. - Current account surplus: 5.3% of GDP, surpassing the benchmark of 3%. Additionally, the scale of the Bank of Korea's foreign exchange market intervention, which reached about 0.6% of GDP, appears to have caught the attention of U.S. officials. While these figures stem from the positive results of a recovery in global supply chains and expanded exports, they may be viewed by the U.S. as factors that could threaten its domestic industries.

Methods of Pressure Used by the United States and Their Nature

The designation of countries for currency monitoring does not entail legal sanctions, but the United States could indirectly exert pressure on South Korea in the following ways: - Securing leverage in trade negotiations: In key industrial sectors such as automobiles, semiconductors, and batteries, the U.S. may use currency issues as a justification to strengthen fair trade investigations. - Demanding limitations on foreign exchange market interventions: There is a possibility of requesting enhanced transparency in the Bank of Korea's interventions or informally pressuring to refrain from substantial interventions. - Conditioning financial cooperation: The U.S. could make currency policy a condition in negotiations related to currency swap agreements, financial information sharing, and multilateral cooperation. These measures may superficially appear as friendly consultations, but ultimately they could constrain South Korea's policy autonomy and increase diplomatic burdens.

Strategic Response Measures of the Lee Jae-myung Administration

In this situation, the Yoon Suk-yeol government needs to go beyond simple defense to employ proactive and strategic responses. The direction can be summarized as follows: 1. Emphasizing identity as a market economy: It is essential to clearly communicate to the international community that Korea operates under a regime of floating exchange rates. By explaining that interventions in the foreign exchange market are inevitable measures to curb excessive volatility in the financial market rather than a policy objective, it can alleviate U.S. concerns and secure an advantage in the international legitimacy battle. 2. Negotiation strategy linked to U.S. legislation: The Inflation Reduction Act (IRA), semiconductor subsidy laws, and other U.S. protectionist measures that adversely affect Korean companies can be brought to the table for exchange rate negotiations. By turning these into bargaining chips, Korea can protect its actual economic interests while also securing leads in resolving exchange rate issues. 3. Utilizing expanded investments in the U.S. as leverage: The large-scale investments of major Korean companies such as Samsung, Hyundai, and SK in the United States are assets for negotiation. By enhancing the perception that Korea is an economic partner creating jobs in the U.S., a friendly atmosphere with the American political sphere can be fostered, helping to ease political tensions around exchange rate issues. 4. Signaling through strategic balanced diplomacy: If excessive pressure from the U.S. continues, Korea may hint at the possibility of expanding economic cooperation with China as a form of indirect check. Of course, this should be used as a limited bargaining card rather than a real implementation, and it must be delicately calibrated to avoid undermining the trust built with the U.S.

Conclusion

The recent designation of countries for currency observation is an important event that goes beyond mere economic indicators, illustrating Korea's strategic position within the global economic order. The Yoon Suk-yeol government needs to view this not just as a simple threat, but rather as a strategic turning point. In today's world, where the international financial order is increasingly intertwined with diplomatic, security, and trade issues, exchange rates no longer remain solely within the realm of economic technicalities. We are now in an era that demands sophisticated and proactive strategies, as well as flexible yet principled diplomatic sensibilities. The way the Yoon Suk-yeol government addresses these challenges will significantly impact Korea's global standing and negotiating power in the future.