🚨 Exchange Rate Crisis at 1350 Won: Trade and Fed Policy Uncertainty Spreads

Today Korean Economic News | 2025.06.30

📌 Despite Middle East Ceasefire, Korean Won Faces Pressure from US Policy Change Concerns

💬 The won-dollar exchange rate, which showed temporary stability after the Israel-Iran ceasefire agreement, is fluctuating again due to US policy uncertainty. With President Trump's unclear position on extending mutual tariff suspension and hints at replacing Fed Chairman Powell, financial market volatility is expanding. If this week's US employment data falls below expectations, expectations for interest rate cuts will rise, potentially strengthening the dollar weakness. This increases the risk of the won-dollar exchange rate falling below the 1350 won line, raising concerns about the impact on the Korean economy.

1️⃣ Easy to Understand

Exchange rates have a bigger impact on our daily lives than we think. Recent changes in international situations are making the won-dollar exchange rate move up and down, so we need to pay attention.

First, let me simply explain what an exchange rate is. The exchange rate is the ratio between our country's money (won) and foreign money (dollar). For example, if the won-dollar exchange rate is 1,350 won, it means you need 1,350 won to buy 1 dollar. If the exchange rate goes down to 1,300 won, the dollar becomes cheaper, which is called "won strength." If it goes up to 1,400 won, the dollar becomes more expensive, which is called "won weakness."

Recently, Israel and Iran agreed to a ceasefire in the Middle East, and international tensions seemed to calm down for a while. Usually, when international conflicts decrease, investors feel more confident and increase investments in risky assets like stocks, while demand for the relatively safe asset, the dollar, decreases, causing the dollar's value to fall.

However, new uncertainties have emerged. President Trump has not clearly stated whether he will extend the "mutual tariff suspension" with other countries. Mutual tariffs are promises not to impose trade penalties on each other. If this ends, the US could impose high tariffs on products from Korea and other countries.

The bigger problem is uncertainty about Federal Reserve (US central bank) policy. When Fed Chairman Powell showed a cautious attitude toward lowering interest rates, President Trump hinted at the possibility of replacing him. If the Fed chairman changes, US interest rate policy could change significantly, greatly affecting financial markets worldwide.

This week, US employment indicators will be announced. If the unemployment rate comes out higher than expected or job growth is smaller than expected, it will be seen as a sign that the US economy is struggling, increasing pressure for interest rate cuts. Then the dollar's value would fall, and the won's value would relatively rise, potentially pushing the exchange rate below 1,350 won.

A falling exchange rate is not always good. It's unfavorable for export companies but favorable for consumers buying imported products, so careful observation is needed due to this two-sided nature.

2️⃣ Economic Terms

📕 Exchange Rate

An exchange rate is an indicator showing the exchange ratio between different countries' currencies.

• A won-dollar exchange rate of 1,350 won means you need 1,350 won to buy 1 dollar.
• When the exchange rate rises, it's called won weakness (dollar strength); when it falls, it's called won strength (dollar weakness).
• It has wide-ranging effects on the entire economy, including exports, imports, prices, and stock markets.

📕 Mutual Tariff Suspension

Mutual tariff suspension is a temporary agreement between trading partners not to impose tariffs on each other.

• It's a policy tool to ease trade conflicts and secure negotiation time.
• When the suspension period ends, existing tariffs may return or new tariffs may be imposed.
• The Trump administration is using this as a negotiating card to pressure for improved trade conditions.

📕 Federal Reserve

The Federal Reserve is the US central bank responsible for monetary policy.

• It handles decisions on base interest rates, money supply control, and financial system stability management.
• The Fed chairman is appointed by the president and confirmed by the Senate, serving a 4-year term with possible reappointment.
• Changes in Fed policy have enormous effects on financial markets worldwide.

📕 Employment Indicators

Employment indicators are economic indicators showing a country's labor market conditions.

• Main indicators include unemployment rate, non-farm job increases, and average hourly wages.
• US employment indicators are released on the first Friday of each month and receive worldwide attention.
• Employment conditions directly affect consumption and economic growth, making them important criteria for interest rate policy decisions.

3️⃣ Principles and Economic Outlook

✅ Impact of US Policy Uncertainty on Exchange Rates

• Let's analyze the structural impact of potential policy changes by the Trump administration on exchange rate markets.

  • First, the possibility of ending mutual tariff suspension is raising concerns about renewed trade conflicts. President Trump's unclear position on extending mutual tariff suspension with major trading partners is increasing market anxiety. Korea has maintained relatively stable trade relations since the 2018 Korea-US FTA revision, but the possibility of US hard-line policies toward China affecting Korea is growing. If additional tariffs are imposed on major export items like semiconductors, automobiles, and steel, direct damage to the Korean economy is expected. As these concerns spread, foreign investors may move away from Korean assets, potentially increasing won weakness pressure.

  • Second, hints at Fed chairman replacement are damaging monetary policy credibility. When Chairman Powell showed a cautious stance on hasty interest rate cuts due to inflation concerns, President Trump mentioned the possibility of replacing him. Fed independence is a core principle of US monetary policy, and policy decisions free from political pressure have been the foundation of trust in the dollar. If the Fed chairman is replaced for political reasons, monetary policy predictability would greatly decrease, likely leading to dollar weakness. In the short term, increased dollar volatility due to policy confusion is expected.

  • Third, changes in global financial markets' risk appetite are affecting capital flows. The Middle East ceasefire temporarily reduced geopolitical risks, increasing investors' risk appetite. This causes funds to move from the safe asset dollar to risky assets like emerging market currencies and stocks. However, it's questionable whether this trend will continue as policy uncertainty within the US grows. Particularly, if US employment indicators are weaker than expected, pressure for Fed interest rate cuts could increase, accelerating dollar weakness.

• US policy uncertainty is acting as a factor threatening not just exchange rates but the overall stability of global financial markets, requiring continuous monitoring.

✅ Economic Impact of Won Strength

• Let's comprehensively examine the impact on the Korean economy if the exchange rate falls below the 1350 won line.

  • First, weakened price competitiveness of export companies is the most direct impact factor. Won strength means higher overseas selling prices for Korean products, reducing export competitiveness. Particularly, semiconductor companies like Samsung Electronics and SK Hynix, and automobile companies like Hyundai and Kia, are sensitive to exchange rate changes due to their high export ratios. A 10 won drop in the exchange rate is estimated to reduce Samsung Electronics' operating profit by about 400 billion won and Hyundai Motor's by about 150 billion won. This could lead to deteriorating corporate performance, negatively affecting employment and investment.

  • Second, falling import prices could have positive effects for consumers. Won strength lowers the prices of imported products, contributing to consumer price stability. Particularly, reduced costs for importing energy like crude oil and natural gas could ease the burden of fuel and electricity costs. Also, falling prices of imported agricultural products, clothing, and electronics could improve households' real purchasing power. According to Bank of Korea analysis, a 10 won drop in the exchange rate has the effect of lowering the consumer price inflation rate by 0.1 percentage points.

  • Third, there are also effects of reduced external debt burden and improved financial stability. Won strength reduces the won-converted value of dollar-denominated external debt, easing debt burden. Korea's external debt is about $660 billion, and exchange rate decline has the effect of reducing interest burden and principal repayment burden. Also, improved foreign currency liquidity could increase financial market stability. However, it's uncertain whether these positive effects can offset the negative effects from export decline.

• Won strength affects exports and imports, companies and consumers differently, so the net effect must be comprehensively evaluated for the overall economy.

✅ Korea's Response Strategy and Policy Tasks

• Let's explore strategic response measures by the government and companies to cope with increased exchange rate volatility.

  • First, government foreign exchange market intervention and macroeconomic policy coordination are important. The Bank of Korea and government need to appropriately intervene in the foreign exchange market to suppress rapid exchange rate changes. With current foreign exchange reserves at about $410 billion, there's sufficient intervention capacity to stabilize exchange rates through dollar purchases during rapid won strength. Also, it's necessary to control excessive capital inflows through coordination of monetary and fiscal policies. Particularly, appropriately managing interest rate differences with the US to reduce capital flow volatility is important.

  • Second, export companies need to strengthen currency hedging strategies and improve competitiveness. Companies should use various derivatives like forward exchange transactions and options to hedge exchange rate risks. Particularly, small and medium export companies often lack expertise in currency hedging, requiring government-level support and education. At the same time, it's important to secure differentiated competitiveness beyond price competitiveness through technological innovation and brand value enhancement. Companies should focus on developing high-value-added products that can be recognized in markets despite won strength.

  • Third, reducing dollar dependence through export market and currency diversification is necessary. A significant portion of Korean exports are settled in dollars, making the structure vulnerable to won-dollar exchange rate changes. Along with expanding trade with emerging markets like China, India, and ASEAN, the proportion of settlements using local currencies or third-country currencies should be increased. Also, reducing dollar dependence through expanding currency swaps between Korea-China and Korea-Japan and strengthening multilateral currency cooperation is an important task. This would not only disperse exchange rate risks but also help secure new growth drivers.

• Exchange rate volatility is an unavoidable reality, so establishing and implementing systematic strategies that can actively respond to it is most important.

4️⃣ In Conclusion

The possibility of the won-dollar exchange rate falling below the 1350 won line is an issue that could have major impacts on the entire Korean economy, beyond simple numerical changes. With exchange rates that temporarily stabilized due to the Middle East ceasefire now fluctuating again due to US policy uncertainty, careful response is needed at this point.

Particularly, the Trump administration's decision on extending mutual tariff suspension and the possibility of Fed chairman replacement are acting as key variables in global financial markets. If these uncertainties continue, volatility across financial markets including not just exchange rates but also stock and bond markets is likely to expand.

Won strength has two sides. While it burdens export companies with weakened competitiveness, it also has positive effects like import price stability and reduced external debt burden. What's important is how to respond to these changes.

The government should make appropriate market interventions to suppress rapid exchange rate changes while building an economic structure resistant to exchange rate volatility in the medium to long term. Companies should also work on strengthening currency hedging strategies and improving competitiveness through technological innovation.

Most importantly, reducing dollar dependence through diversifying export markets and settlement currencies is crucial. This would not only disperse exchange rate risks but also help secure new growth drivers.

In a situation where global economic uncertainty is growing, strengthening Korea's ability to buffer external shocks is the most urgent task. This is a time when proactive and systematic responses that can turn crisis into opportunity are needed.