In the late 1960s, the standard model of the foreign exchange market had supply and demand as stable function of exports and imports. However, the period of floating rates that began in the early 1970s has revealed that exchange rates exhibit the volatility of financial market prices. The monetary approach to exchange rate determination had essentially one way causation from money to exchange rates, via purchasing power parity. The exchange rate, in the asset market view, is determined by financial market equilibrium conditions. Initial stock of assets determine temporary equilibrium values for endogenous such as exchange rates. It influences the trade balance and current account. The latter in turn is the rate of accumulation of national claims or liabilities to foreigners, and this feeds back into financial market equilibrium. This study uses a Tobin's financial asset equilibrium framework to test the portfolio balance model of exchange rate determination in Korea. In Branson, Halttunen and Masson (1979), three outside assets were recognized for each country: Ml, cumulated current account, and net government debt. Their exchange rate equation excluded the two government debts. In Dornbush (1980), there was only one asset whose unexpected, movement had impact on exchange rate movement and it was the net stock of foreign assets held by residents. In this study, we limit our specification to the outside assets of the two countries (Korea-U.S.A.) under consideration. A small country like Korea is one whose bonds are not held by non-residents and which has no impact on the foreign inter est rate. This mean that the accumulation of foreign financial assets is done through the