[Why&Next] Highest Monthly Average Since FX Crisis... Three Key Points About the 1,500 Won Exchange Rate Era

Exchange Rate Rocked by Iran War... March Average Exceeds 1,490 Won
Korean Won Takes a Direct Hit... Largest Drop Among Major Currencies

External Factors Trigger Foreign Capital Outflows, 'Energy Vulnerable Country' Evaluation
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The won-dollar exchange rate continues to remain at its highest level since the global financial crisis. After surging into the 1,460 won range immediately following the outbreak of the Middle East war at the end of February, the exchange rate has remained above 1,500 won for five consecutive days. The average exchange rate for March, which took a direct hit from the Middle East conflict, was the highest since the foreign exchange crisis. The exchange rate has been highly sensitive to statements from the United States and Iran, fluctuating in response, but the high-rate trend shows no signs of easing. Experts analyze that this is the result of a combination of external variables such as the Middle East war, foreign capital outflows from the Korean stock market, and the shock from rising oil prices, all impacting Korea simultaneously. Currency authorities are most wary of a scenario where the current situation becomes entrenched, leading to a widening gap with other major economies and intensifying one-sided movement.

March average exchange rate nears 1,500 won... Pace of won depreciation accelerates compared to major countries

The KOSPI index started with a sharp rise of over 5% on previous expectations, triggering a buy-side circuit breaker early in the session. On April 1st, the status of the domestic stock market was displayed on the electronic board in the dealing room at the Hana Bank headquarters in Jung-gu, Seoul. On the same day, the won-dollar exchange rate opened at 1508.5 won, down 21.6 won from the previous trading day. Photo by Kang Jinhyung

According to the Bank of Korea on April 1, the average won-dollar exchange rate in March was 1,492.5 won. This is an increase of 44.12 won in just one month from the February average of 1,448.38 won. On a monthly average basis, this surpassed the level seen in March 1998 (1,488.87 won) during the aftermath of the foreign exchange crisis, marking the fourth highest level ever recorded. It is the highest level since the 1997–1998 foreign exchange crisis. The won-dollar exchange rate has remained above 1,500 won for four consecutive trading days recently, with the rate of increase also expanding. On the last day of March, the exchange rate closed weekly trading at 1,530.1 won, the highest level so far this year.

However, on this day, the won-dollar exchange rate opened lower at 1,508.5 won in the Seoul foreign exchange market. This was due to growing expectations for a ceasefire after U.S. President Donald Trump expressed his intention to end the war with Iran within two to three weeks and withdraw U.S. troops. This stands in contrast to the heightened tensions of the previous day, when there were even concerns about the possibility of escalation. Thus, the foreign exchange market is currently being heavily swayed by the war dynamics between the United States and Iran, with uncertainty increasing.

The Middle East war, as an exogenous variable, is a global phenomenon. While the decline in the exchange rate on this day eased concerns about one-sided movement that had persisted since March 24, it is noteworthy that the recent upward trend in the won-dollar exchange rate has been steeper than that of other major countries. As of March 31, the won-dollar exchange rate had risen 6.27% compared to February 27, before the war began. This increase was larger than that of Japan (2.49%), which tends to move in tandem with the won, and Taiwan (-2.53%), which has a similar economic structure, as well as other advanced economies. This means that the value of the won has declined more sharply. Even when compared to the Dollar Index (DXY), which measures the value of the dollar against six major currencies and rose 2.97% over the past month, the increase in the won-dollar exchange rate is considered excessive.

35 trillion won foreign equity exodus... Coupled with 'energy-vulnerable country' assessment

The sharp decline in the value of the won is attributed, from a supply-demand perspective, to the direct impact of foreign investors withdrawing funds from the domestic stock market. In fact, foreign investors recorded a net sell-off of 35.7474 trillion won in the domestic stock market last month alone. This marks nine consecutive trading days of net outflows since March 19. Compared to February's figure of -21.0601 trillion won, the amount of outflows was much larger. The increased demand to exchange won for dollars has fueled the rise of the exchange rate.

This trend is analyzed as the result of 'won rebalancing,' a move to reduce the proportion of domestic stock holdings that had increased due to recent stock price surges, as profit-taking sales and stock price corrections occurred. External variables, such as the strengthening of the dollar and the spread of risk aversion due to the Middle East war, have also prompted foreign investors to withdraw funds, as the burden of foreign exchange losses has grown. Korea’s economy, which is vulnerable to high oil prices, appears to have contributed to dampening investor sentiment as well.

Yoon Kyungsoo, Director General of the International Department at the Bank of Korea, commented, "The rapid pace of foreign equity outflows has certainly created upward pressure on the exchange rate from a supply-demand perspective," and added, "This has been compounded by market assessments of the Middle East situation, resulting in additional pressure on the won."

Most concerned about 'divergence from major country trends, one-sided flows'... Focus on FX Stabilization Law and WGBI effects

Currency authorities are more concerned about the direction of the exchange rate than the absolute level itself. They are closely monitoring situations where the value of the won deviates excessively from the value of the dollar or other major currencies, or where upward pressure on the exchange rate becomes particularly pronounced. On this day, the won-dollar exchange rate limited the upward trend that had continued since March 24, alleviating concerns about one-sided movement for now. If tensions in the Middle East continue to ease, the won-dollar exchange rate could also stabilize. However, uncertainty remains, as the market is still hesitant to fully trust President Trump's statements.

Amid these developments, attention is being paid to the FX Stabilization Law passed by the National Assembly the previous day, as well as the effects of Korea’s inclusion in the World Government Bond Index (WGBI) starting this month. The National Assembly passed three FX stabilization laws as part of measures to stabilize the foreign exchange market. The key points include the introduction of the 'Return-to-Domestic Market Account (RIA)' to attract overseas investment funds back into domestic stocks, and the establishment of a new capital gains tax deduction for currency-hedged products. As Korea’s inclusion in the WGBI is fully implemented this month, large-scale inflows of dollars are expected from foreign investors purchasing domestic bonds, which could help stabilize the exchange rate.

Director Yoon stated, "The effect of the WGBI will vary depending on whether funds enter through swaps or by selling spot currency, but it will have a positive impact on supply and demand. Now that the RIA has just been launched and is starting to operate, and as currency-hedged products are improved, changes in resident overseas securities investment trends are also expected to help improve supply and demand."

This content was produced with the assistance of AI translation services.