[The Editors' Verdict] The Shadow of Currency Wars: "The Real Economic Test Begins Now"

F4 Leadership Safeguards the Market
Active Forex Strategy Needed
Ahead of the Looming Currency War

The political turmoil came to a pause on the 4th with the Constitutional Court's impeachment ruling. Although the impeachment decision does not resolve all issues at once, the significant variable of leadership vacuum has been removed, creating an opportunity for economic transition. Now is the time for the Korean economy to reestablish the foundation for a leap forward.

Despite political uncertainty, the Korean economy was able to remain relatively stable thanks to the swift responses of the economic leaders known as the 'F4.' The heads of the Ministry of Strategy and Finance, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service played the role of an 'invisible safety net,' protecting market sentiment and blocking systemic risks.

However, the real test begins now. Although the political turmoil has been managed, the economic team must maintain economic stability until the early presidential election in June. The domestic and international economic environment remains challenging, with the imposition of reciprocal tariffs by the United States and market shocks following the presidential impeachment. The upcoming U.S. Treasury Department’s currency report, scheduled for mid-month, is also a critical variable. Amid concerns over rising prices and economic slowdown caused by indiscriminate tariff policies, the Trump administration is highly likely to demand currency adjustments from trading partners. This implies that the tariff war could escalate into a currency war.

On the 8th, amid ongoing concerns over escalating trade wars, exchange rates such as KRW/USD and KRW/JPY were displayed at the currency exchange booth in Terminal 2 of Incheon International Airport. Photo by Yonhap News

The global economy has already entered an era of currency wars. The intertwined issues of U.S.-China conflicts, global interest rate instability, and emerging market currency volatility have heightened sensitivity to exchange rates. President Trump has criticized countries with trade surpluses such as China, Japan, and Korea, claiming their currencies are undervalued. Some figures have mentioned a 'second Plaza Accord,' advocating for a dollar devaluation. This could be a strategy to secure U.S. advantage in the trade war and mark the beginning of currency pressure. The U.S. has ample room to use exchange rates as a more efficient economic weapon than tariffs.

While the possibility of Korea being designated as a currency manipulator is low, the U.S. criteria can change according to political objectives, so complacency is dangerous. The U.S. sets three criteria: trade surplus size, foreign exchange market intervention, and current account balance, but in reality, domestic political schedules and industrial protection logic play a larger role. Moreover, Korea has already been included several times on the watch list. Although the government has emphasized the temporary nature of its interventions by disclosing foreign exchange market intervention details quarterly, if U.S. standards tighten, controversies could reignite. Especially in the recent phase of won depreciation, government market stabilization measures could be misunderstood as 'intentional intervention.' This could lead to tangible damages such as foreign capital outflows, financial market instability, export restrictions to the U.S., and a decline in national credit ratings.

Going forward, economic authorities must adopt more proactive response strategies. By clearly defining the standards and purposes of foreign exchange market interventions and transparently disclosing related information, they should present predictable policies to the market and the international community. Structural responses must also be pursued simultaneously. Diversifying the structure of Korea’s trade surplus with the U.S. and stabilizing the current account base are strategies that can help avoid repeated exchange rate controversies. If necessary, active cooperation with multilateral forums such as the G20 and the International Monetary Fund (IMF) should be utilized.

Beyond exchange rates, our economy faces complex risks including prolonged high interest rates, household debt, real estate imbalances, and worsening youth economic sentiment. Added to this are global economic slowdown, supply chain instability, and Middle East tensions, all of which require strengthening defenses against external shocks. Policy coordination and diplomacy with major countries must operate with equal precision.

The uncertainty caused by the leadership vacuum has been filled, but proving leadership in the global market starts now. The crisis response capabilities of the 'F4' must expand into a foundation of sustainable resilience and global trust. This is why the leadership of the F4 until the early election, and the role of the new economic team to be launched thereafter, are more crucial than ever. The promise that "the Korean economy is unshakable" must continue.