Exchange Rate System

Changes in the System

It was not until February 1980 that Korea changed its fixed exchange rate system to a multiple-basket pegged exchange rate system, permitting the exchange rate to fluctuate against major currencies. Under this system, the basic exchange rate of the won against the U.S. dollar was determined as the weighted average of two baskets, the SDR basket and a trade-weighted basket composed of major trading currencies, with the addition of an adjustment factor which was termed the policy variable.

* Exchange Rate = αㆍSDR basket + βㆍTWB + P [α+β=1, TWB : Trade weighted basket, P : policy variable]

In March 1990, the multiple-basket pegged exchange rate system was replaced by the Market Average Exchange Rate System (MARS), in which the exchange rate was, in principle, determined by the interplay of foreign exchange supply and demand in the domestic foreign exchange market. Under this system, the interbank spot rate was allowed to move within an upper and a lower limit around each day's basic exchange rate.

In December 1997,the daily fluctuation limits for the interbank exchange rate were abolished and, thus, Korea's exchange rate system was shifted to a free-floating system.

Change of Exchange Rate Bands

Customer Rates and the Basic Exchange Rate

Customer rates are decided independently by each foreign exchange bank, and revised in reference to the movement of the interbank spot exchange rate.

The basic exchange rate of the Korean won against the U.S. dollar (market average rate) is determined as the transactions volume-weighted average of the rates applied in the previous business day's transactions between foreign exchange banks through brokers.

Exchange Rate Trends

The basic Korean won rates against foreign currencies other than the U.S. dollar are arrived at by arbitrating between the U.S. dollar rates of foreign currencies in the international markets and the basic exchange rate of the Korean won against the U.S. dollar.

The basic Korean won rates against the U.S. dollar and other currencies are calculated and provided by a designated brokerage company once a day. Usually, they are used as reference rates for taxation, accounting, statistics, and so on.