Bank of Korea: It will watch closely if currency rates stray from fundamentals

Bank of Korea: It will watch closely if currency rates stray from fundamentals

Bank of Korea: It Will Watch Closely If Currency Rates Stray from Fundamentals

The Bank of Korea (BOK) has emphasized its commitment to monitoring exchange rate movements and addressing deviations from economic fundamentals, as recent volatility in the U.S. dollar/Korean won (USD/KRW) rate has sparked debate over the role of domestic liquidity and external pressures. As of March 2026, the USD/KRW exchange rate hovered near 1,430, reflecting persistent upward pressure despite Korea's strong economic fundamentals, including a current account surplus and stable inflation.

The BOK has refuted claims that excessive liquidity—measured by broad money supply (M2)—has driven the won's depreciation. Recent M2 growth remains below historical averages and aligns with trends in major economies, averaging 4–5% since 2024. While some critics cite cumulative repurchase (RP) transactions as evidence of liquidity expansion, the BOK clarifies that these short-term operations do not equate to sustained money supply increases. The average outstanding balance, not cumulative transaction volumes, accurately reflects liquidity provision.

The U.S. Treasury's recent semi-annual currency report echoed this sentiment, noting that the won's weakness in late 2025 was "not in line with Korea's strong economic fundamentals," including controlled inflation and a narrowing growth gap with the U.S. The report cited domestic factors such as policy rate cuts and political instability as contributing to depreciation pressures but did not accuse Korea of currency manipulation, maintaining it on a "monitoring list" for further observation.

The BOK attributes recent exchange rate fluctuations to market sentiment, supply-demand imbalances, and global capital flows rather than monetary policy. For instance, South Korean residents' portfolio investments in foreign securities surged to $129.4 billion in 2025, exceeding the current account surplus and exerting upward pressure on the won.

To stabilize the foreign exchange market, the BOK has implemented open market operations, including RP sales and monetary stabilization bonds, to absorb excess liquidity. However, it has ruled out direct monetary policy targeting of the exchange rate, stressing that such measures could disrupt broader macroeconomic stability. Instead, the BOK prioritizes addressing structural challenges, such as enhancing capital markets and boosting growth potential, to reinforce long-term fundamentals.

As global uncertainties persist, the BOK will continue to monitor market conditions closely, balancing short-term stabilization efforts with structural reforms to ensure sustainable economic resilience.