Korea should prepare its monetary defenses as Trump may target its currency policy, according to the Korea International Trade Association (KITA).

The upcoming summit between US President Donald Trump and South Korean President Lee Jae Myung is set to be a significant event, with currency measures potentially taking centre stage. Analysts suggest that President Trump's next target could be currency measures, given the ongoing discussions about South Korea's currency practices.

Since November, South Korea has been redesignated on the US Treasury Department's currency watch list. This move signals that Washington will be closely monitoring Korea's currency practices. The US think tank, Center for Strategic and International Studies, has published a report suggesting that President Trump may use his visit to South Korea not just to celebrate the trade deal but as leverage for more concessions on investment, nontariff barriers, and currency manipulation.

The report also points to risks of exchange rate volatility. A one percent point increase in volatility could cut export volume by 1.54%. This volatility could be a concern, especially given the potential for a weaker dollar to lead to a relatively weaker Korean won. While a weaker won tends to enhance the competitiveness of South Korean exports, making them cheaper in global markets, it could also raise import costs, especially for energy and raw materials, which South Korea relies on heavily. This could increase inflationary pressures, complicating the Bank of Korea’s (BOK) monetary policy stance as it balances inflation control with supporting growth.

The background context includes substantial trade uncertainties. Recent US-Korea discussions resulted in a 15% tariff agreement on South Korean goods, lower than an initially threatened 25% tariff, but still a tariff that could affect trade flows. The weaker dollar may partially offset these tariff impacts by improving export price competitiveness, which is crucial given the tight trade environment.

The International Monetary Fund (IMF) has linked the weakening of the dollar and easing of U.S. tariffs to a more favorable outlook for South Korea’s economy, albeit with a modest 0.8% growth forecast for 2025 due to lingering trade and domestic challenges. The IMF expects that this easing of financial conditions, partially driven by a weaker dollar, could support gradual economic recovery alongside the trade deal.

For importers, a lower exchange rate reduces won-denominated import prices of goods, leading to an increase in import volume. However, currency volatility and import cost increases could pose inflation and financial stability risks. To mitigate these risks, the Korea International Trade Association (KITA) suggests preparing for a potential decline in the exchange rate by expanding currency swap arrangements, strengthening foreign exchange market stabilization measures, and supporting exporters in managing currency risks.

KITA has also warned that Trump could push for a weaker dollar to reduce the trade deficit and boost domestic manufacturing. Miran, known as the architect of Trump's tariffs and the proposed "Mar-a-Lago Accord," which aims to devalue the greenback, has been nominated by Trump to fill a vacancy at the Federal Reserve's Board of Governors. Currency issues could emerge as a key agenda item in the upcoming summit.

When the won-dollar exchange rate falls, exporters might raise their dollar-denominated export prices to protect won-based profitability, risking reduced shipment volumes and ultimately causing greater loss. KITA views the proposed "Mar-a-Lago Accord" as unlikely to be formally implemented, but it notes that the US could push for currency appreciation among trade partners, including South Korea. Heightened volatility could deter exporters from signing contracts due to uncertainty, while rising hedging costs could squeeze profit margins and ultimately shrink export volumes.

In summary, the weaker dollar strategy could have mixed but overall positive effects on South Korea's economy and exports amid the upcoming Lee-Trump summit. The BOK’s future monetary policy (potential rate cuts) will be critical in managing these dynamics. The way the two leaders navigate trade terms and currency effects will shape near-term South Korean economic and export prospects.