🚨 Dollar Weakness Not Translating to Won Strength: Analysis of Exchange Rate Stagnation at 1400 KRW Level
Today Korean Economic News | 2025.04.20
📌 Korean Won Strength Delayed Despite Dollar Weakness... Exchange Rate Fixed at 1400 KRW Level
💬 Despite the US dollar experiencing its largest drop in about 40 years, the KRW/USD exchange rate has remained relatively stable at around 1420 won. This is analyzed as the result of a complex combination of factors including Korea's high trade dependency, the US-China tariff war, and domestic political uncertainty. The Korean won is considered to be excessively depreciated compared to its fundamentals, and a decrease in the exchange rate is unlikely in the short term. A Bank of Korea official stated, "The Korean won is likely to continue weakening amid ongoing global uncertainties," adding that "we will monitor exchange rate volatility and take market stabilization measures if necessary."
1️⃣ Easy Understanding
Why isn't the Korean won strengthening even though the dollar value has fallen significantly? Let me explain this phenomenon in an easy-to-understand way.
Normally, when the dollar value falls, the Korean won value should rise. This would mean the exchange rate (won/dollar) should decrease. However, despite the dollar value falling by the largest margin in 40 years, the won/dollar exchange rate has remained virtually unchanged at around 1420 won.
Why is this happening? There are three main reasons:
First, trade tensions between the United States and China are intensifying. President Trump has imposed a 25% tariff on Korean products, and the trade war with China has reignited. Since Korea is a country with high trade dependency, this situation negatively impacts the value of the Korean won.
Second, domestic political uncertainty is growing. Foreign investors are showing a tendency to withdraw funds from the Korean market due to concerns about government policy direction and downward adjustments in economic growth forecasts.
Third, as global economic uncertainty increases, there is a preference for safe assets. As investors prefer relatively safer assets over riskier emerging market currencies, emerging market currencies like the Korean won are weakening.
This situation may benefit export companies in the short term. They can receive more won when converting dollars earned overseas. However, it can have negative effects on the overall economy, such as increasing imported raw material prices, raising overseas travel costs, and reducing foreign investment.
Ultimately, the Korean won is likely to maintain its weakness for the time being as global economic environment and domestic conditions interact in complex ways. Financial authorities have indicated they will take market stabilization measures if necessary, but it appears difficult to fundamentally change the direction of the exchange rate.
2️⃣ Economic Terms
📕 Exchange Rate
The exchange rate refers to the ratio at which one country's currency is exchanged for another country's currency.
- If the won/dollar exchange rate is 1420 won, it means that 1420 won is needed to buy one dollar.
- When the exchange rate rises (won weakens), it benefits export companies, and when it falls (won strengthens), it benefits import companies and overseas travelers.
📕 Dollar Index
The Dollar Index is an index that represents the value of the US dollar against six major currencies (Euro, Yen, Pound, Canadian Dollar, Swedish Krona, Swiss Franc).
- When the Dollar Index rises, the dollar value strengthens, and when it falls, the dollar value weakens.
- Currently, the Dollar Index has fallen by the largest margin in about 40 years.
📕 Currency Appreciation and Depreciation
Currency appreciation is when the value of a country's currency rises, and currency depreciation is when the value of a country's currency falls.
- When the Korean won appreciates, the won/dollar exchange rate falls, and when the Korean won depreciates, the won/dollar exchange rate rises.
- Currently, the Korean won is considered to be excessively depreciated compared to its fundamentals (economic strength).
📕 Foreign Exchange Market Intervention
Foreign exchange market intervention refers to a central bank buying or selling its own currency or foreign currency in the foreign exchange market to adjust the value of its currency.
- The Bank of Korea can intervene to stabilize the market when the Korean won value fluctuates rapidly.
- However, intervention has only short-term effects and is difficult to change the long-term exchange rate trend.
3️⃣ Principles and Economic Outlook
💡 Background of Delayed Korean Won Strength Despite Dollar Weakness
Let's analyze why the Korean won value is not rising despite global dollar weakness.
First, the intensification of US-China trade conflicts and strengthening protectionism are fueling Korean won weakness. Following President Trump's reinauguration, the United States has imposed a 25% tariff on Korean products, and conflicts with China have reignited. Korea has a trade-dependent economic structure with an export dependency of about 40%, so the deterioration of the global trade environment leads to a direct hit. In particular, concerns about export slowdowns are growing as Korea's major export items such as semiconductors, automobiles, and steel are directly affected by high tariffs. This acts as a factor that lowers foreign investors' confidence in the Korean market and promotes capital outflow. The longer trade conflicts persist, the more likely the Korean won weakness will continue.
Second, domestic political and economic uncertainties are dampening foreign investment sentiment. As uncertainty about Korea's policy direction has recently increased, foreign investors' wait-and-see attitude has strengthened. The downward adjustment of economic growth forecasts and the slower-than-expected recovery of the semiconductor industry are also factors reducing investment attractiveness. In fact, foreign investors have recorded net sales of about 5 trillion won in the Korean stock market this year. Additionally, the possibility of an expanded Korea-US interest rate gap as expectations for domestic interest rate cuts increase also acts as a factor for Korean won weakness. Without restored confidence in the domestic economy, it is difficult to expect Korean won strengthening through foreign capital inflow.
Third, the preference for safe assets due to increased global uncertainty is acting unfavorably for emerging market currencies. As volatility in international financial markets expands due to US-China trade conflicts, Middle East geopolitical risks, and concerns about global economic recession, investors' preference for safe assets is strengthening. This is a factor that increases demand for relatively safe assets such as the dollar, yen, and gold rather than emerging market currencies. In fact, while the Dollar Index has fallen, most emerging market currencies, including the Korean won, are showing weakness. Korea in particular is recognized as one of the markets that investors leave first when global uncertainty increases due to North Korea risk and export-dependent economic structure. These structural characteristics act as factors limiting Korean won strengthening even in a dollar weakness phase.
The phenomenon of the Korean won value not rising despite dollar weakness is the result of complex interactions of geopolitical and political uncertainties beyond simple economic factors. In particular, Korea's externally dependent economic structure and characteristics as an emerging market currency are acting as factors for Korean won weakness in the current global uncertainty. Since these factors are difficult to resolve in the short term, the Korean won weakness trend is likely to continue for the time being.
💡 Impact of Exchange Rate Fixation on the Domestic Economy
Let's look at the economic impact as the won/dollar exchange rate becomes fixed at the 1400 won level.
First, it's a short-term boon for export companies but could be an obstacle to structural improvement in the long term. Korean won weakness increases the price competitiveness of export companies and allows them to realize more profits when converting earnings from overseas into won. This has a positive impact on Korea's main export industries such as semiconductors, automobiles, and shipbuilding in the short term. But this is a double-edged sword. Competitiveness improvement dependent on exchange rates can delay companies' structural innovation and high value-added efforts. In the long term, a management strategy that relies on exchange rates rather than strengthening internal competitiveness through cost reduction, quality improvement, and technological innovation is not sustainable. Also, in a structure where intermediate goods are imported and processed and then exported in the global supply chain, profits can be offset by increased raw material import costs.
Second, the negative impact is significant for consumers and import-dependent industries. Korean won weakness leads to higher import prices, stimulating consumer prices. In particular, the cost of importing necessities such as energy, raw materials, and food increases, putting a burden on the general public's economy. Costs for overseas travel and study also increase, reducing consumer welfare. In terms of industry, production costs increase for companies that depend on imported raw materials and parts. Industries with a high proportion of dollar-denominated costs, such as petrochemicals, oil refining, aviation, and shipping, may face deteriorating profitability. Small and medium-sized enterprises in particular are vulnerable to exchange risk management and may be hit harder. It can also have an adverse effect on attracting foreign investment and recruiting excellent talent from overseas.
Third, it increases uncertainty in financial markets and the macroeconomy as a whole. High volatility in exchange rates makes decision-making difficult for companies and investors. Companies have to be cautious about long-term investment and overseas business planning, which is a factor that weakens economic growth momentum. Exchange rate uncertainty dampens foreign investors' investment sentiment in Korean assets and increases the risk of capital outflow. High exchange rates can also negatively impact financial stability by increasing foreign debt burden. In the long term, it can affect the international status and credibility of the Korean won, which is also linked to the international evaluation of the Korean economy.
The fixation of the won/dollar exchange rate at the 1400 won level gives short-term benefits to export companies but has a dual impact of increasing the burden on consumers and import companies and increasing uncertainty throughout the economy. Especially in a situation where the Korean economy is pursuing growth through high value-added industry promotion and domestic market expansion, continued Korean won weakness can hinder industrial structure improvement and qualitative growth of the economy. Therefore, maintaining an appropriate level of exchange rate and managing volatility can be considered important policy tasks.
💡 Tasks and Outlook for Korean Won Value Recovery
Let's look at policy tasks and future exchange rate outlook for Korean won value recovery.
First, strengthening economic fundamentals and enhancing policy credibility are necessary. The fundamental recovery of the Korean won value starts with strengthening the fundamentals of the Korean economy. Economic fundamentals must be strengthened through enhancing the competitiveness of core industries, securing growth engines, and improving the trade balance. In particular, the delayed recovery of the semiconductor industry and the decline in the US market share of the automobile industry are being pointed out as vulnerabilities of our economy. It is also important to gain market confidence through consistent economic policies and effective communication. The higher the policy uncertainty, the more foreign investors demand a premium for Korean assets, which acts as a factor for the decline in the Korean won value. The policy credibility of the central bank and the will of financial authorities to stabilize the market need to be clearly communicated.
Second, policy efforts are needed to stabilize the foreign exchange market. Excessive volatility in exchange rates has a negative impact on the overall economy. The Bank of Korea and the Ministry of Strategy and Finance should strengthen monitoring of the foreign exchange market and aim for market stabilization through appropriate intervention when necessary. However, intervention should be short-term and limited, and should be done in a way that respects market functions as much as possible. It is also important to strengthen the safety net of the foreign exchange market through expanding foreign exchange reserves and currency swaps. In particular, currency swaps with major countries such as the United States, Japan, and China can be important safety devices in times of global financial instability. International cooperation and communication related to exchange rates also need to be strengthened.
Third, in the medium to long term, strengthening the international status of the Korean won and enhancing resilience to external shocks are necessary. It is important to gradually promote the internationalization of the Korean won to enhance the status of the Korean won in the international financial market. This requires expanding Korean won-denominated transactions, improving foreigners' accessibility to the domestic financial market, and advancing the Korean won settlement system. It is also important to reduce dependence on specific countries or industries through diversification of industrial structure and trade partners. Reducing external dependence and enhancing economic resilience through activating the domestic market are also long-term tasks. A balanced approach is needed to enhance the structural strengths of the Korean economy while complementing its vulnerabilities.
Exchange rate is an important indicator that reflects a country's economic situation and external credibility. The current Korean won weakness is the result of complex interactions of global and domestic factors, and it is difficult to expect a rapid recovery in the short term. Fundamental recovery of the Korean won value is possible only when the financial authorities' efforts to stabilize the market are accompanied by strengthening economic fundamentals and enhancing policy credibility. Especially in a situation where global uncertainties such as the spread of protectionism and intensification of US-China conflicts continue, enhancing the resilience of the Korean economy to external shocks can be considered an important task.
4️⃣ In Conclusion
Despite the US dollar experiencing its largest drop in about 40 years, a phenomenon is occurring where the won/dollar exchange rate is becoming fixed at the 1400 won level. Generally, dollar weakness should lead to won strength (exchange rate decrease), but currently, a 'decoupling' phenomenon is occurring where this is not happening. This is the result of complex interactions of factors such as the intensification of US-China trade conflicts, Korea's high external dependence, domestic political and economic uncertainties, and global preference for safe assets.
This exchange rate fixation can work favorably for export companies in the short term, but it increases the burden on consumers and import-dependent industries. The cost of importing necessities such as energy, raw materials, and food increases, leading to inflationary pressures, and costs for overseas travel and study also rise. In the long term, there is also concern that it may strengthen companies' exchange rate-dependent management practices and hinder fundamental competitiveness improvement.
The Bank of Korea and the Ministry of Strategy and Finance plan to strengthen monitoring of the foreign exchange market and take market stabilization measures if necessary, but it is not easy to change the fundamental direction of the exchange rate. For the recovery of the Korean won value, a medium to long-term approach such as strengthening economic fundamentals, enhancing policy credibility, and diversifying industrial structure is needed.
Ultimately, since the exchange rate is an indicator that reflects the fundamentals of the economy and external credibility, strengthening the constitution of the Korean economy and enhancing external competitiveness will be the fundamental solution for the recovery of the Korean won value. Rather than short-term market intervention, it can be said that an important task is to increase the resilience of the economy and create an economic structure that can respond to global uncertainties.