"KRW 1,250 Floor?" What's Ahead for the Exchange Rate... Ample Room to Fall Further vs. Concerns Over Its Rapid Decline

Won's Nominal Effective Exchange Rate at 94.83... Highest in More Than Two Years
Further Declines Seen as Likely... Some Expect Downside Resistance at 1,270-1,280 Won

The won’s nominal effective exchange rate, measured against the currencies of major trading partners, rebounded sharply in three months to its highest level in more than two years as the won-dollar exchange rate fell to the low 1,320-won range. Bank of Korea Governor Shin Hyun-song has stressed that the won remains undervalued, noting that its nominal effective exchange rate is still below its long-term average despite the recent recovery. Markets are divided over whether the exchange rate has further room to fall.

Nominal Effective Exchange Rate Hits More Than Two-Year High... "Still Below Long-Term Average"

According to the Bank for International Settlements (BIS) and the Bank of Korea’s Economic Statistics System (ECOS) on October 26, the won’s nominal effective exchange rate stood at 94.83 (2020=100) as of October 20. This was its highest level since October 9, 2024, when it reached 94.91. The nominal effective exchange rate measures a currency’s value while accounting for trade weights with major trading partners. A higher figure indicates an increase in the won’s value.

The won’s nominal effective exchange rate hovered around 100 from 2020 through mid-2021, during the COVID-19 pandemic, and then mostly fluctuated in the mid-to-high 90s. It fell to the 91 level just after the emergency martial law crisis, then dropped to the high 80s in March and April 2025, when U.S. tariff concerns coincided with the political turmoil over the impeachment. The decline continued thereafter. The nominal effective exchange rate fell to the 86 level during the won’s weakness at the end of 2025 amid supply-and-demand issues, then dropped further to the 84 level in March 2026 amid the war in the Middle East. In June, when the won-dollar exchange rate approached 1,600 won partly due to foreign investors’ stock rebalancing, it fell to 81.99.

The exchange rate, however, reversed course in the second half of 2026. The monthly average won-dollar exchange rate, as of 3:30 p.m., surged to 1,528.0 won in June, but then plunged to 1,488.9 won in July, 1,404.4 won in August and 1,358.8 won in September. The nominal effective exchange rate also rebounded sharply. It recovered to the 90 level in September, reaching 91.99, and has continued to rise since.

The won’s real effective exchange rate, which also accounts for price differences with trading partners, has followed a similar trend. After falling to 83.03 in June, it jumped to 92.73 last month, its highest level since November 2024, when it stood at 93.43.

Despite this sharp recent rebound, Governor Shin said there was "room for the exchange rate to fall further." At a press conference on October 22, following the decision to hold the base rate steady, he said, "The dollar has been strong in recent years, so it is important to look at the BIS effective exchange rate, which takes into account the weights of our trading partners." He added, "As of the end of August, the BIS effective exchange rate was around 89, below the long-term average of 101. Whether we look at the won-dollar exchange rate or the effective exchange rate, it is true that the won is still weaker than in previous years." The following day, at the Bank of Korea’s comprehensive parliamentary audit before the National Assembly’s Finance and Economy Planning Committee, he also cited the effective exchange rate, saying, "Historically, the won is still somewhat weak." Market participants estimated that the monthly average won-dollar exchange rate would have to be between 1,230 and 1,250 won for the nominal effective exchange rate to reach 100 at this point.

Keep 1,250 Won as a Potential Floor vs. Concern Over How Quickly the Rate Has Fallen

Markets generally believe there is still room for the exchange rate to fall further, although views differ on the strength of the downward pressure. Some say the exchange rate’s floor should be considered as low as 1,250 won, arguing that downward pressure is prevailing amid a record current account surplus and improved dollar supply and demand. Cha Younghu, a researcher at Eugene Investment & Securities, said, "The fact that the won has continued to strengthen despite a series of external setbacks and large-scale net selling of domestic stocks by foreign investors shows that the exchange rate has considerable room to fall if external conditions stabilize." He added, "Shareholder returns in the semiconductor sector and investment related to megaprojects alone are expected to generate an annual foreign-currency repatriation effect of $210 billion. That exceeds the $130 billion annualized net outflow of portfolio and direct investment, based on the trend over the past three years." He forecast that "for at least the next year, the effect of capital flowing into Korea, which strengthens the won, will outweigh pressure for foreign currency to flow back out."

However, some analysts say that even if the exchange rate falls further, downside rigidity will increase in the upper 1,200-won range, given the burden of its recent rapid decline. Moon Dawoon, a researcher at Korea Investment & Securities, said, "We expect downside rigidity to increase around 1,270 to 1,280 won." By contrast, he noted, "Depending on how external conditions develop, including concerns surrounding the U.S. midterm elections, geopolitical risks and uncertainty over the Federal Reserve’s monetary policy, the exchange rate could easily rebound to around 1,380 to 1,390 won, the level it reached after the U.S. Federal Open Market Committee (FOMC) meeting in September."

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