"Worse Than the Thai Baht?"... Won Hits 1,560: What’s Happening [Exchange Rate Surges Past 1,500]①

The Enigma of the Won's Value Lagging Behind Korea's Economic Status


Monthly Average at 1,522.4 Won in June... Surging as High as 1,561.5 Won in Overnight Trading

Won Depreciates 3.48% Against the Dollar... Larger Drop Than the Thai Baht

Foreign Investor Rebalancing and Profit-Taking Amid Rapid Rise in Domestic Stock Market

Middle East War and High Oil Prices Fuel Strong Dollar
Concerns Over Prolonged High U.S. Interest Rates

Resurfacing U.S. Tariff Issues and Increased Direct Investment in the U.S. Also Affecting Sentiment

This month, the average won-dollar exchange rate has soared past 1,520 won, marking the highest level in approximately 28 years since the Asian financial crisis. During intraday trading, the rate even surpassed 1,560 won, setting a new record high since the global financial crisis. Recently, the depreciation of the Korean won has been steeper not only compared to major developed economies but also emerging markets such as the Thai baht. This trend is puzzling, especially given that Korea is solidifying its economic standing with a record current account surplus, backed by a semiconductor boom driven by the artificial intelligence (AI) wave.

The causes are complex. Most directly, the recent sharp rise in the domestic stock market has led to foreign investors selling dollars and withdrawing capital from the Korean market. The prolonged Middle East war, now exceeding three months, has also highlighted the vulnerability of the Korean economy due to its heavy dependence on energy imports from this region, further contributing to the won’s decline. Additionally, the sustained high oil prices and robust U.S. employment figures have fueled concerns that the Federal Reserve may maintain a tight monetary policy, supporting a strong dollar and further weakening the won. Furthermore, the expansion of investments in the U.S. and renewed concerns over tariffs by the United States have strengthened the inclination to hold dollars, which has also accelerated the depreciation of the won.

On the 5th, the KOSPI and other indexes are displayed on the status board at the Hana Bank dealing room in Jung-gu, Seoul. Photo by Yonhap News.

Monthly Average at 1,522.4 Won... Highest in 28 Years and 4 Months Since the Asian Financial Crisis

According to the Economic Statistics System (ECOS) of the Bank of Korea on June 7, the average closing won-dollar exchange rate from the beginning of this month through the 5th was 1,522.4 won. This is the highest level in 28 years and 4 months since February 1998 (1,626.8 won) during the Asian financial crisis. Although only one week has passed in June, the won-dollar exchange rate has stayed above 1,500 won for three consecutive weeks since May 15, gradually climbing higher. During overnight trading on June 5 (from 3:30 p.m. on the 5th to 2:00 a.m. on the 6th), the rate reached as high as 1,561.5 won, marking the highest intraday level in 17 years and 3 months since March 6, 2009 (1,597.0 won).

The average exchange rate for the second quarter of this year, up to June 5, was 1,491.0 won, also the highest since the first quarter of 1998 (1,596.9 won). On a yearly basis, the average rate for this year through June 5 was 1,477.1 won, far surpassing last year's record annual average high of 1,422.0 won.

The recent weakness of the won is striking even when compared to major global currencies. From the beginning of this month through the 6th, the won depreciated by 3.48% against the dollar. Among major economies, only Russia, which is at war with Ukraine, saw a larger drop (-3.54%). The won’s decline outpaced the Swiss franc (-1.93%), the euro (-1.21%), and the Japanese yen (-0.65%), as well as emerging market currencies such as the Chilean peso (-2.71%) and the Thai baht (-1.10%). Even taking into account that the dollar index, which measures the value of the dollar against the currencies of six major economies, rose by 1.2% this month, the magnitude of the won’s depreciation is notable. Looking at the year to date up to June 5, the won’s depreciation rate (-6.48%) ranks among the highest of major currencies.

Domestic Capital Flows Exert Greater Influence on Exchange Rate

Experts analyze that the pronounced weakness of the won is the result of a combination of internal and external factors and structural changes. In particular, the influence of domestic capital flows on the exchange rate has significantly increased. A prime example is the continued selling by foreign investors in the Korean stock market. Since the beginning of this year, foreign investors have sold more than 118 trillion won worth of shares in the Korea Exchange. In just the first four trading days of June alone, net sales exceeded 18 trillion won. This is the result of both profit-taking following the sharp rise in the KOSPI and rebalancing demand leading to adjustments in the allocation of domestic stocks.

The problem is that rebalancing demand, particularly focused on the semiconductor sector due to the surge in market capitalization, remains strong. Gyuyoun Jeon, an economist at Hana Securities, said, "Under U.S. tax law, to maintain the status of a regulated investment company (RIC) and benefit from corporate tax relief, the investment in a single stock must be less than 25%, and the combined total of stocks exceeding 5% each must be less than 50% of total assets." He added, "After rebalancing, foreign capital needs to flow back into the Korean stock market based on a positive outlook in order to ease the upward pressure on the exchange rate."

Korea has been a net external asset country since the mid-2010s, as the increase in external assets has outpaced the growth in liabilities. Although this has received less attention recently, the growing domestic trend of investing in overseas assets—especially U.S. stocks—by households is also considered a structural factor increasing dollar demand. Jingyeong Lee, an economist at Shinhan Securities, stated, "The expansion of overseas asset allocation led by the private sector is a constant underlying factor for the weak won."

In fact, from January to April this year, Koreans’ overseas stock investments increased by 33.4 billion dollars, while foreign investment in Korean stocks declined by about 43.6 billion dollars, according to the financial account of the international balance of payments. Yoomi Kim, an economist at Kiwoom Securities, commented, "Despite an expanding current account surplus, the capital account has experienced massive outflows, which is translating into upward pressure on the exchange rate." She added, "This shows that the won-dollar exchange rate is now more sensitive to capital flows than to interest rate differentials or the current account balance."

On April 8, amid the prolonged Middle East war, employees were informing drivers about the implementation of the strengthened 'two-day' vehicle restriction system, which replaced the previous odd-even 'five-day' vehicle restriction system for public institutions, in front of the Government Complex Seoul in Jongno-gu, Seoul.

Middle East War and High Oil Prices Fuel Strong Dollar+ Concerns Over Prolonged High U.S. Interest Rates

Continued strong dollar pressure due to external uncertainties also contributes to the relative weakness of the won. Amid the prolonged geopolitical uncertainty in the Middle East, international oil prices and U.S. Treasury yields have risen, while concerns over U.S. inflation and the possibility of further rate hikes have fueled the strength of the dollar.

As an energy-importing country, the Korean won faces heightened downward pressure in times of rising oil prices. Yongtaek Jung, an economist at IBK Investment & Securities, explained, "The direct trigger for the sharp rise in the exchange rate from the 1,420-won level at the end of February was the outbreak of the Middle East war and the resulting surge in international oil prices." He added, "Given Korea’s high dependence on energy imports, especially crude oil and gas from the Middle East, the economy’s vulnerability has been exposed, leading to a greater depreciation of the won compared to other currencies."

The prolonged high oil prices due to the Middle East war have heightened U.S. inflation concerns and have supported the strong dollar. Jung further noted, "High oil prices are driving up energy costs, which in turn is putting upward pressure on U.S. inflation expectations." With the international oil price (WTI) consistently above 90 dollars per barrel, the market expects the U.S. Consumer Price Index (CPI) for May, to be released on June 10, to show a year-on-year increase exceeding 4%. The relative strength of the U.S. economy, signaled by steady employment, is also adding weight to inflation concerns.

These factors are fueling expectations that the Federal Reserve will continue its monetary tightening, increasing the likelihood of further rate hikes and intensifying the strong dollar pressure. Indeed, when the unexpectedly strong U.S. employment data for May was released on June 5, expectations for a rate hike within the year gained traction, and the dollar index surpassed the 100 mark for the first time in two months. Daun Moon, a researcher at Korea Investment & Securities, remarked, "Despite the ongoing war, employment stability signals have strengthened for three consecutive months. What's more positive than a strong rebound in new job creation is that the increase is spreading across more industries." He added, "For the time being, the Fed can focus its policy response on war-driven inflation, as it currently has the capacity to do so."

Resurfacing U.S. Tariff Issues... Impact of Increased Direct Investment in the U.S.

Rising tensions over U.S. tariffs have also contributed to the won’s weakness. The U.S. Trade Representative (USTR) recently announced plans to impose a 10% tariff on imports from the European Union (EU), the United Kingdom, and others for failing to properly block products made with forced labor, and to apply a 12.5% tariff to products from countries such as South Korea, China, and Japan where legal mechanisms to prohibit such imports are lacking, raising the alert level among trade authorities.

Large-scale investment commitments to the United States have also been analyzed as a factor putting pressure on the won’s supply-demand balance. Last year, Korea pledged to invest 350 billion dollars in the U.S. and agreed to lower mutual tariffs from 25% to 15%. Gyuyoun Jeon of Hana Securities noted, "The rising proportion of direct investment in the U.S. is reducing the incentive for dollar supply in the domestic market." Jung also observed, "Although the investments have not yet been fully executed, this is already exerting psychological pressure on participants in the foreign exchange market." He added, "Even if companies that committed to U.S. investments see a significant increase in dollar inflows from expanded exports, there is little incentive to convert those dollars into won and bring funds back home." It is also being considered that once these investments commence, there will be a significant surge in demand for dollars.

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