🚨 Korean Won Shows Highest Volatility in Asia

Today Korean Economic News for Beginners | 2025.07.31

0️⃣ Shaken More Than Japan Due to US-Korea Trade Negotiation Uncertainty

📌 July Won-Dollar Exchange Rate Volatility Hits Asian High, Additional Sharp Rise Feared Depending on Trade Negotiation Results

💬 During July, the Korean won-dollar exchange rate showed the highest volatility among major Asian currencies. As uncertainty in US-Korea tariff negotiations grew, the won's daily average volatility reached 0.8%, higher than Japan's yen (0.6%). Particularly, as the possibility of the US imposing up to 50% tariffs on Korean goods was raised, downward pressure on the won continues in the foreign exchange market. The exchange rate, which started at around 1,350 won at the beginning of the month, rose to the 1,390 won range by month-end, and the possibility of exceeding 1,400 won depending on negotiation results cannot be ruled out. Meanwhile, the dollar is showing strength across Asia due to the US "Buy America" policy and high interest rates.

1️⃣ Easy Understanding

When the exchange rate fluctuates wildly, it means our country's currency value is unstable. Especially with uncertainty about how trade negotiations with the US will end, investors are getting nervous and increasingly trying to sell won and buy dollars.

First, let me explain what an exchange rate is. The exchange rate shows how much US money (dollars) you can buy with 1,000 Korean won. For example, if the exchange rate is 1,350 won, it means you need 1,350 won to buy 1 dollar.

When the exchange rate goes up, it means you need more won to buy dollars, which means our money's value has dropped. Conversely, if the exchange rate goes down, it means our money's value has increased.

During July, the won-dollar exchange rate rose from 1,350 won to 1,390 won, which is an increase of 40 won. More importantly, the exchange rate changed dramatically from day to day. Some days it went up by 10 won, other days it went down by 5 won, like a roller coaster.

This volatility happens because investors are not sure what will happen to Korea's economy in the future. If the US puts high tariffs on Korean products, our country's exports could decrease and the economy could become difficult. That's why investors prefer safe dollars over the won.

Especially, our country has an economic structure that heavily depends on exports, so it reacts very sensitively to trade disputes or tariff issues. Japan is in a similar situation, but Korea was shaken more than Japan because we are in a more disadvantageous position in negotiations with the US.

Ultimately, high exchange rate volatility is a signal that our economy is sensitive to external shocks, meaning the exchange rate could continue to be unstable in the future.

2️⃣ Economic Terms

📕 Exchange Rate Volatility

Exchange rate volatility is an indicator showing how much the exchange rate moved during a certain period.

• High volatility means the exchange rate went up and down frequently and significantly.
• It's usually measured by daily average volatility rate, and above 0.5% is considered high.
• The higher the volatility, the more unstable the currency is evaluated to be.

📕 Won Weakness

Won weakness means the Korean won's value is falling compared to the dollar.

• When the exchange rate rises (1,350 won → 1,390 won), it's won weakness.
• This can lead to rising import prices and inflation pressure.
• However, it also has positive effects for export companies by improving price competitiveness.

📕 Trade Dependence

Trade dependence shows how much exports and imports account for in a country's economy.

• Korea's trade dependence is about 70% compared to GDP, which is very high.
• The higher the trade dependence, the more sensitively it reacts to exchange rate changes or trade disputes.
• This is the main reason why Korea's exchange rate shows greater volatility than other Asian countries.

📕 Buy America Policy

The Buy America policy is the US protectionist trade policy that prioritizes purchasing American products and services.

• It encourages buying domestic products to protect American businesses and jobs.
• This policy increases dollar demand and continues dollar strength.
• Other countries' currencies relatively face downward pressure.

3️⃣ Principles and Economic Outlook

✅ Analysis of Causes Behind Increased Exchange Rate Volatility

• Let's examine the structural reasons why the Korean won showed the highest volatility among major Asian countries.

  • First, uncertainty in US-Korea tariff negotiations is the direct cause of exchange rate volatility. As the US raised the possibility of imposing up to 50% tariffs on Korean goods, anxiety about the won grew in the foreign exchange market. Particularly, if Korea's main export items like automobiles, steel, and semiconductors are included in tariff targets, concerns about trade balance deterioration due to export decline arise. Investors reflected this uncertainty by selling won and preferring safe-haven assets like dollars. In fact, the exchange rate moved sharply whenever news related to negotiations came out.

  • Second, Korea's high trade dependence amplifies exchange rate sensitivity. Korea's trade dependence is about 70% of GDP, much higher than Japan (35%) and China (38%). This means very sensitive reactions to trade policy changes or external economic shocks. Particularly, with exports to the US accounting for 15%, changes in US trade policy have direct impact. In contrast, Japan showed relatively stable patterns with high domestic demand proportion and exports distributed to various regions.

  • Third, changes in foreign investors' sentiment toward Korean assets also increased volatility. As foreigners withdrew funds from Korean stocks and bonds, won selling pressure intensified. The amount of net selling by foreigners in the Korean stock market during July exceeded 2 trillion won. This was because they judged that Korea's economic growth prospects became unclear due to concerns about trade disputes with the US. Particularly, foreign investors who were concerned about the possibility of deteriorating performance of Korean export companies showed risk-averse tendencies.

• Korea's structural vulnerabilities combined with external shocks amplified exchange rate volatility, requiring fundamental economic structural improvement.

✅ Impact of Sharp Exchange Rate Rise on Korean Economy

• Let's analyze the specific impact that won weakness and increased exchange rate volatility will have on each sector of the economy.

  • First, inflation pressure will increase due to rising import prices. If the exchange rate rises from 1,350 won to 1,390 won by 40 won (about 3%), import prices are likely to rise at a similar level. Particularly, price increases for essential imports like energy (crude oil, gas), raw materials (iron ore, copper), and food (grains, meat) are inevitable. This will lead to increased production costs and ultimately appear as consumer price increases. The Bank of Korea has analyzed that consumer prices rise by 0.4-0.5 percentage points when the exchange rate rises 10%, so inflation pressure is expected to increase even with the current level of exchange rate rise.

  • Second, companies' profitability may deteriorate due to increased raw material procurement costs. Manufacturing companies depend on imports for a significant portion of raw materials needed for production, so they take a direct hit when exchange rates rise. Particularly, the burden will be heavy for raw material-intensive industries like petrochemicals, steel, and electronic parts. While companies exporting finished products have positive effects of improved price competitiveness, overall profitability deterioration is inevitable if raw material cost increases are larger. Small and medium enterprises are likely to suffer greater damage due to lack of currency hedging capabilities.

  • Third, household consumption contraction is feared due to decreased real purchasing power. If rising import prices lead to increases in daily necessities prices, households' living cost burden will increase. Particularly, if prices of items closely related to daily life like food, clothing, and electronics rise, ordinary people's perceived inflation will be significant. This can lead to decreased household consumption capacity and become a cause of domestic economic contraction. Also, overseas travel costs will increase, possibly reducing tourism demand. The government is considering policies like reducing tariffs on daily necessities or expanding fuel subsidies to mitigate these side effects.

• While the impact of exchange rate rises differs by sector, overall it will act as a factor for economic slowdown due to inflation pressure and decreased purchasing power.

✅ Future Exchange Rate Outlook and Response Strategies

• Let's comprehensively examine future exchange rate movements and response measures that the government and companies should take.

  • First, the direction of the exchange rate is expected to be determined by the results of US-Korea tariff negotiations. If negotiations are successfully concluded and tariff imposition is avoided or decided at low levels, anxiety about the won may be resolved and the exchange rate could fall to the 1,350 won range. Conversely, if negotiations break down or high tariffs are imposed, forecasts suggest it could rise beyond 1,400 won to even 1,450 won. Particularly, with the tariff imposition deadline of next month's 1st approaching, market attention is focused on negotiation results. The government is making all-out efforts to conclude negotiations using all diplomatic channels, but it's difficult to guarantee results.

  • Second, US monetary policy and whether dollar strength continues is also an important variable. As long as the US maintains high interest rates and continues the "Buy America" policy, the dollar strength trend is expected to continue. Also, with the US economy showing relatively solid growth, safe-haven asset preference will also continue. The Bank of Korea also has constraints in operating monetary policy considering the interest rate gap with the US. If interest rates are lowered too much, capital outflow and exchange rate rise pressure could increase. Therefore, won weakness pressure is likely to continue for the time being.

  • Third, preemptive responses by the government and companies are key to mitigating exchange rate shocks. The government continues exchange rate stabilization intervention using foreign reserves ($420 billion) and is considering additional intervention if necessary. It's also expanding exchange rate hedging support for export companies and strengthening exchange rate risk management education for small and medium enterprises. Companies should actively utilize hedging strategies by adjusting raw material purchase timing or through forward exchange transactions in preparation for exchange rate fluctuations. Particularly, companies with high import dependence should review in advance whether price pass-through is possible when exchange rates rise, and prepare measures like securing alternative suppliers.

• For exchange rate stabilization, successful trade negotiations, structural vulnerability improvement, and preemptive risk management must be comprehensively implemented.

4️⃣ In Conclusion

The high volatility of the Korean won exchange rate in July is a warning sign revealing structural vulnerabilities in the Korean economy. With an economic structure that has high trade dependence and is sensitive to external shocks, combined with uncertainty in US-Korea tariff negotiations, it recorded the highest level of exchange rate volatility in Asia.

The core of this situation depends on the results of US-Korea tariff negotiations. If negotiations are successfully concluded, anxiety about the won may be resolved and the exchange rate could stabilize, but if negotiations break down or high tariffs are imposed, the possibility of exceeding 1,400 won cannot be ruled out.

The ripple effects of exchange rate rises are also significant. Inflation pressure due to rising import prices, increased raw material costs for companies, and decreased real purchasing power of households are expected to work together to burden the overall economy.

However, such crises could also become opportunities for improving Korea's economic constitution. They can serve as momentum to reduce excessive trade dependence, expand the domestic demand base, and diversify export markets. They're also opportunities for companies to improve exchange rate risk management capabilities and for the government to advance foreign exchange market stabilization policies.

In the short term, successfully concluding tariff negotiations through the government's active diplomatic efforts is the top priority. At the same time, exchange rate stabilization intervention using foreign reserves and strengthening support for companies' exchange rate hedging should be reinforced.

Ultimately, this expansion of exchange rate volatility is sending a message that the Korean economy must transform into a structure that can respond more flexibly to global uncertainties. It's time to turn crisis into opportunity and build a more stable and sustainable economic constitution.