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Untitled Document
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South Korea |
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The currency of South Korea is Won (W), which was pegged to the U.S. Dollar. The Ministry of Finance was in charge of exchange control. It carried out policy with respect to prescription of currency and method of settlement, foreign exchange operations, payments for nonmerchandise transactions, and capital transactions and transfers. Other than above functions, the Bank of Korea (BOK) also regulated and intervened the operations in the exchange market, delegated authority to control payments related to invisibles and certain capital transactions.
The single currency peg (SCP) system was established in May 1964. According to this system, the exchange rate of Korean Won had been pegged to the U.S. Dollar. At the same time, a foreign exchange certificate system was also introduced. The Korean government set the lower limit of the Won's exchange rate and did not allow commercial banks to trade foreign exchange certificates below this limit. (Stefan, p.70)
In February 1980, the Korean Won's fixed link to the U.S. Dollar was abandoned and a controlled, floating Effective Rate was established. After 16 years of SCP system against the U.S. Dollar, the multiple currency basket peg (MCBP) system was introduced to Korea in March 1980. The Effective Rate was linked to the SDR in combination with a basket of the currencies of South Korea's major trading partners, namely the U.S., Japan, Germany and Canada. But other policy factors were also considered in determining the value of Korean Won. Starting from 1989, the exchange rate of Korean Won was allowed to fluctuate within a percentage range against the basic rate. In March 1990, the Effective Rate was replaced by a Market Average Rate (MAR). There was a managed floating exchange rate regime and the exchange rate was determined by the market forces in the interbank market, the Seoul Foreign Exchange Market. Under the MAR system, the intraday fluctuation of the Korean Won-U.S. Dollar spot rate was restricted within a narrow band. The BOK limited the banks from quoting rates too close to the upper or lower limits of the band (KIEP, p.9-11). The fluctuation range of the exchange rate in the interbank market was widened from 0.4% to 2.25% during 1990-1995.
Thailand's sudden decision to float the Thai Baht on 2 July 1997 caused the Korean Won to depreciate rapidly. Attempt to defense the local currency, the Korean government widened its Won trading band from 2.25% to 10% on 19 November, and finally abolished its band to allow the Won to float on 12 December. (KIEP, p.12)
Major sources of reference include:
1) World Currency Yearbook (WCY)
2) IMF Annual Report on Exchange Arrangement and Exchange Restriction (IMF)
3) Chung, Chae-shick, Yang, Doo-yong and Joo, Sangyoung. 2000. Foreign Exchange Market Liberalization: The Case of Korea. Korea: Korea Institute for International Economic Policy. (KIEP)
4) Stefan Collignon, Jean Pisani-Ferry and Yung Chul Park. 1999. Exchange Rate Policies in Emerging Asian Countries. London: TJ International Ltd. (Stefan) |
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Date
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Changes
to the exchange rate regime
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Korean Won per U.S. Dollar
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| 3 May 1964 | The Official Rate of W130.00 per U.S. Dollar was abolished and a "unitary floating system" was established based on a Basic Rate of W255.00 per U.S. Dollar. Foreign exchange certificates were introduced, issued by the Bank of Korea against foreign currencies, which could be sold in a free market. (WCY 1984, p.449) | | | 28 November 1964 | The foreign exchange certificate system was extended to cover practically all foreign exchange dealings. (WCY 1984, p.449) | | | 28 June 1971 | Since the establishment of Fluctuating Certificate Rate system, the foreign exchange value for the Korean Won had been depreciated. The Korean Won was cut from W327.40/328.90 to W370.00/371.60 per U.S. Dollar. (WCY 1984, p.449) | | | December 1971 | Following the devaluation of U.S. Dollar, South Korea reduced the gold content of the Korean Won by 7.89%. (WCY 1984, p.449) | | | June 1972 | Korean Won declined to W399.00 per U.S. Dollar. (WCY 1984, p.449) | | | 20 February 1973 | Following the 1973 U.S. Dollar devaluation, Seoul reduced the gold content of the Korean Won by 10% so as to retain the unit's exchange rate at W399.00 per U.S. Dollar. (WCY 1984, p.449) | | | 4 December 1974 | With increasing oil prices and higher imports costs, the gold content of the Korean Won was cut by 46.88% and devaluating the Basic Rate to W480.00 per U.S. Dollar. At the same time, the Fluctuating Certificate Rate was depreciated to W484.00 per U.S. Dollar. (WCY 1984, p.449) | | | 1975 | The exchange rate in the exchange certificate market was maintained around W484 per U.S. Dollar. (IMF 1976, p.282) | | | 18 April 1975 | The Ministry of Finance delegated to the Bank of Korea additional powers to approve foreign exchange transactions. (IMF 1976, p.284) | | | 1977 | Forward exchange transactions with a maturity of up to 1 year might be concluded with the Bank of Korea, foreign banks, and other foreign exchange banks. (IMF 1978, p.249) | | | 4 January 1978 | The Government lowered the exchange rate applicable to domestic loans in support of exports from W420 to W400 per U.S. Dollar. The support fund rate for the purchase of finished export goods for storage was lowered from W400 to W380 per U.S. Dollar, and the rate for purchasing raw materials for exports was decreased from W450 to W430 per U.S. Dollar. (IMF 1979, p.250) | | | 1 March 1979 | Foreign currency swaps between branches of foreign banks in Korea and Korean banks were permitted. (IMF 1980, p.239) | 485.000 | | 12 January 1980 | The Fluctuating Certificate Rate was slashed 16.55%, from W484.00 to W580.00 per U.S. Dollar. (WCY 1984, p.449) | | | 27 February 1980 | The Korean Won's fixed link to the U.S. Dollar was abandoned and a controlled, floating Effective Rate was established. The exchange value of the Effective Rate was linked to the SDR in combination with a basket of the currencies of South Korea's major trading partners, but other factors would also be taken into account in determining the exchange rate. The Fluctuating Certificate Rate was abolished. (WCY 1984, p.449) | | | 1 July 1980 | Authorization was granted for forward exchange transactions between the Korean Won and foreign currencies. These foreign currencies covered the U.S. Dollar, the Pound Sterling, the Deutsche Mark, and the Japanese Yen. (IMF 1981, p.251 & p.253) | | | 31 December 1980 | | 662.300 | | 31 December 1981 | | 702.700 | | 23 April 1982 | The spread between buying and selling rates applied by foreign and local foreign exchange banks for foreign currencies was decreased from 0.6% to 0.5%. (IMF 1983, p.292) | | | 26 July 1982 | The maximum period for forward transactions between a foreign exchange bank and a customer was lengthened from 6 months to 1 year, and the limit on the maturity of forward transactions between foreign exchange banks was abolished. (IMF 1982, p.293) There were no specific restrictions on the terms of forward contracts. However, the terms of forward contracts between foreign exchange banks and nonbank customers must be based on a bona fide transaction. (IMF 1983, p.291) | | | 31 December 1982 | | 750.700 | | 1 May 1983 | Limitations were abolished on the eligibility of foreign currencies for forward transactions against the Korean Won. (Previously, eligibility was limited to the U.S. Dollar, the Pound Sterling, the Deutsche Mark, and the Japanese Yen). (IMF 1984, p.300) | | | 7 November 1983 | Limitations on the terms of swap transactions between the Bank of Korea and foreign bank branches were abolished, thereby permitting long-term swaps with maturities of more than 1 year. (IMF 1984, p.300) | | | 31 December 1983 | | 797.500 | | 31 December 1984 | | 829.500 | | 31 December 1985 | | 892.500 | | 10 July 1986 | The margin between buying and selling rates for foreign exchange telegraphic transfers was increased from base rate plus or minus 0.25% to base rate plus or minus 0.45%. (IMF 1987, p.311) | | | 31 December 1986 | | 865.300 | | 1 October 1987 | The regulations on the period of forward exchange contracts between the Korean Won and foreign currencies, previously limited to 1 year or less, were abolished. (IMF 1988, p.302) | | | 31 December 1987 | | 795.900 | | 1 November 1988 | Korea formally accepted the obligation of Article VIII, Sections 2,3, and 4 of the Fund Agreement. (IMF 1989, p.278) | | | 30 December 1988 | | 686.900 | | 20 September 1989 | The telegraphic transfer rates were deregulated within the range of 0.4% margins above and below the base rate for the U.S. Dollar and 0.8% margins above and below the base rate for other currencies. (IMF 1990, p.275) | | | 29 December 1989 | | 678.429-678.971 | | 2 March 1990 | The Effective Rate was replaced by a Market Average Rate (MAR) which was to be determined in the interbank market, based on a weighted average of rates for Korean Won/U.S. Dollar spot transactions of the previous day and was to float freely within margins and plus and minus 0.4% against MAR. (WCY 1990/93, p.458) The exchange rates of the Korean Won against currencies other than the U.S. Dollar would be determined in relation to the exchange rate of the U.S. Dollar against these currencies in the international foreign exchange market. For transactions with customers in other currencies, the Korean Won would be allowed to fluctuate within daily margins of plus and minus 0.8%. (IMF 1991, p.280) | | | 31 December 1990 | | 713.534-719.266 | | 2 September 1991 | The daily trading range in the interbank market for the Korean Won-U.S. Dollar exchange rate was widened from plus and minus 0.4% to plus and minus 0.6% of the weighted average of the MAR of the previous day. The margin for transactions in U.S. Dollars between banks and their customers was widened from 0.4% to 0.6%. The corresponding margin for customer transactions in other currencies remained unchanged at 0.8%. (IMF 1992, p.278) | | | 31 December 1991 | | 760.800 | | 1992 | The buying and selling rates, which offered to customers, were set freely by foreign exchange banks. (IMF 1993, p.280) | | | 1 July 1992 | The Korean Won-U.S. Dollar exchange rate in the interbank market was allowed to fluctuate within fixed margins of plus and minus 0.8% against the MAR of the previous day. (IMF 1993, p.280) | | | 1 September 1992 | The European Currency Unit (ECU) was included in the list of prescribed currencies. The Deutsche Mark was permitted to use in the call market together with the Japanese Yen and the U.S. Dollar. (IMF 1993, p.283) | | | 31 December 1992 | | 788.400 | | 1 October 1993 | The Korean Won-U.S. Dollar exchange rate in the interbank market was allowed to fluctuate within fixed margins of plus and minus 1% against the MAR of the previous day. Forward transactions involving foreign currencies or domestic currency in amounts not exceeding $3 million were exempted from the "underlying documentation" (UD) requirement. The ceiling on foreign exchange deposits payable in Korean Won was abolished. (IMF 1994, p.275 & p.278) | | | 31 December 1993 | | 808.100 | | 1 November 1994 | The Korean Won-U.S. Dollar exchange rate in the interbank market was allowed to fluctuate within fixed margins of plus and minus 1.5% against the MAR of the previous day. (IMF 1995, p.273) | | | 31 December 1994 | | 788.700 | | 1 December 1995 | The Korean Won-U.S. Dollar exchange rate in the interbank market was allowed to fluctuate within fixed margins of plus and minus 2.25% against the MAR of the previous day. (IMF 1996, p.268) | | | 31 December 1995 | | 774.700 | | 1 June 1996 | The prescription of currency requirements applicable to foreign currencies was abolished. (IMF 1996, p.269) | | | 16 December 1997 | The exchange rate of the Korean Won was allowed to float freely which was determined on the basis of supply and demand. (IMF 1998, p. 491) | |
Notes: Starting from 1979, the value of the Korean Won was represented by the telegraphic transfer selling rate of foreign exchange banks to customers. (IMF 1980, p.238) In 1989, the telegraphic transfer buying and selling rates offered to customers were deregulated within the ranges of 0.4% above and below the base rate (W678.70 at the end of 1989) for the U.S. Dollar. (IMF 1990, p.272) In 1990, the telegraphic transfer buying and selling rates offered to customers were set freely by the foreign exchange banks and were allowed to fluctuate within the daily margins of plus and minus 0.4% against the MAR (716.40 at the end of 1990). (IMF 1991, p.277) In 1991, the telegraphic transfer buying and selling rates offered to customers were set freely by the foreign exchange banks and was allowed to fluctuate within the daily margins of plus and minus 0.6% against the MAR (760.80 at the end of 1991). (IMF 1992, p.275) Starting from 1992, the telegraphic transfer buying and selling rates offered to customers were set freely by the foreign exchange banks and a middle rate for the U.S. Dollar was announced at the end of each year. |
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