🚨 Korean Won-Dollar Exchange Rate Breaks 1,450 Won
Today Korean Economic News for Beginners | 2025.11.08
0️⃣ High Exchange Rate After 7 Months, Concerns About 1,500 Won Era
📌 Poor US Employment & Foreign Selling Pressure Weaken Won…Structural Dollar Demand Increases
💬 On November 7th, the won-dollar exchange rate in Seoul's foreign exchange market closed at 1,456.90 won, breaking through 1,450 won for the first time in 7 months. This represents a sharp rise of 14.90 won from the previous trading day, resulting from strengthened global risk-aversion sentiment due to poor US employment data and continued selling of Korean stocks by foreign investors. Particularly, as October US non-farm payroll numbers fell far short of expectations, concerns about economic slowdown grew, and investors rushed to the safe-haven dollar, causing the won to plummet. Experts predict the exchange rate could rise to 1,480 won in the near term, with the possibility of reaching 1,500 won by year-end. With Korean companies expanding overseas investments and "Seohak Ants" (Korean retail investors buying US stocks) increasing dollar demand, this structural won weakness may lead to a long-term trend change rather than a short-term adjustment.
1️⃣ Easy Understanding
When the exchange rate rises, it means the value of Korea's currency (won) is falling and the value of the US currency (dollar) is rising. Think of it like an apple's price going from 1,000 won to 1,500 won - you need more won to buy one dollar.
Just days ago, you needed about 1,440 won to buy $1, but now you need 1,456 won. A 16 won difference may seem small, but for large currency exchanges or importing companies, it's a huge difference. For example, if you exchange $10,000, you'd have to pay an extra 160,000 won.
Why is this happening? There are three main reasons.
First, signs appeared that the US economy is weaker than expected. The number of new jobs in October fell far short of experts' predictions. They expected about 200,000 new jobs, but only about 120,000 were actually created. Fewer new jobs is a sign that the economy is slowing down.
This might sound strange. "If the US economy is bad, shouldn't the dollar's value also fall?" Usually yes. But when the economy becomes unstable, investors want to put their money in "safe places." The safest assets worldwide are considered to be US dollars and US government bonds. So paradoxically, when economic uncertainty increases, dollar demand increases and the dollar's value rises.
Second, foreign investors are selling Korean stocks. When foreigners invest in Korea's stock market, they convert dollars to won to buy stocks. But now they're selling stocks and converting that money back to dollars to take home. When this continues, more people are selling won than buying it, so the won's value falls.
Why are foreigners selling Korean stocks? There are various reasons, but recently the KOSPI index has been weak and as global economic uncertainty grows, they're reducing investments in emerging markets. Although Korea is a developed economy by size, it's still often classified as an emerging market in currency markets.
Third, overseas investments by Korean companies and individuals have greatly increased. Have you heard of "Seohak Ants"? This refers to Korean individual investors who invest in US stocks. To buy US stocks, they need to convert won to dollars. Also, major companies like Samsung Electronics and Hyundai Motor need massive amounts of dollars to build overseas factories or acquire local companies.
Let's look at an example. Person A wants to invest $10,000 in US stocks. A few months ago when the rate was 1,400 won, they needed 14 million won. But now they need 14.56 million won. That's 560,000 won more. Even for the same investment amount, you need more won when the exchange rate rises.
What about importing companies? Companies that import raw materials or products from abroad pay in dollars. When the exchange rate rises, they need more won to buy the same items, increasing their costs. Eventually, these cost increases can lead to product price increases, raising our living costs.
Experts predict the exchange rate will rise further. Short-term forecasts suggest it could reach 1,480 won, with some predicting 1,500 won by year-end. This would be the highest level since October 2022 when it exceeded 1,440 won.
What's important is that this exchange rate increase may not be temporary. In the past, when rates rose, the government would intervene to stabilize them. But with structural changes in recent years like increased overseas investment and foreign capital outflow, a "high exchange rate" may become the new normal.
Ultimately, exchange rate increases directly affect our daily lives. Travel costs increase, imported goods become more expensive, and overall inflation pressure rises.
2️⃣ Economic Terms
📕 Exchange Rate
The exchange rate is the ratio at which one country's currency exchanges for another country's currency.
- A won-dollar rate of 1,450 won means you need 1,450 won to buy $1.
- When the rate rises (e.g., 1,400 won → 1,450 won), it means the won's value is falling and the dollar's value is rising.
- Exchange rates are determined by various factors including economic conditions, interest rate differences, trade balance, and investment fund flows between countries.
📕 Risk Aversion
Risk aversion is investors' tendency to sell risky assets and buy safe assets when economic uncertainty or recession concerns grow.
- Assets with high volatility like stocks or emerging market currencies are classified as "risky assets."
- Assets like US dollars, gold, and US government bonds are considered "safe assets."
- When global economic uncertainty increases, risk aversion strengthens, dollar demand increases, and emerging market currency values fall.
📕 Net Foreign Financial Assets
Net foreign financial assets are the net amount after subtracting foreign investments in a country from that country's overseas assets.
- When Korea's net foreign financial assets increase, it means domestic capital is flowing out faster.
- When overseas factory construction by companies and overseas stock investments by individuals increase, net foreign financial assets grow.
- This structurally increases dollar demand and can act as pressure for won weakness.
📕 Foreign Exchange Reserves
Foreign exchange reserves are foreign currency assets held by the government or central bank.
- The Bank of Korea holds approximately $420 billion in foreign exchange reserves.
- When exchange rates spike, the government can stabilize rates by selling dollars and buying won using these reserves.
- However, excessive intervention can reduce reserves and lower economic credibility.
3️⃣ Principles and Economic Outlook
✅ Basic Principles of Exchange Rate Determination
Exchange rates are ultimately determined at the balance point between dollar demand and won supply.
First, when more people want to buy dollars, the dollar's price rises. Exchange rates are ultimately "prices." Just as apple prices rise when more people want to buy apples, when more people want to buy dollars, the dollar's price (exchange rate) rises. Recently, as Korean companies increased overseas investments and individual investors bought many US stocks, dollar demand surged. Statistics show individuals' net overseas stock purchases exceeded $47 billion this year, the largest ever. All this money ultimately leads to dollar demand, creating upward pressure on exchange rates.
Second, interest rate differences are also important factors. When the US Federal Reserve maintains high interest rates, returns on dollar assets increase. For example, if US Treasury yields are 4.5% and Korean Treasury yields are 3.0%, investors naturally want to invest in US Treasuries. This capital movement increases dollar demand and raises exchange rates. Recently, the US has been unable to easily lower rates due to inflation, and the continued US-Korea interest rate gap has been acting as a factor for exchange rate increases.
Third, trade balance and current account also affect exchange rates. When Korea exports a lot and runs a trade surplus, foreign companies need to convert dollars to won to buy our products, increasing won demand and lowering exchange rates. Conversely, trade deficits mean we need to pay more dollars for imports, raising rates. Korean trade balance has been unstable in recent years, increasing exchange rate volatility.
Exchange rates are not just currency exchange ratios between two countries, but important indicators showing the overall health of an economy.
✅ Increasing Structural Won Weakness Factors
Recent exchange rate increases are analyzed to be more like structural changes than temporary shocks.
First, individual overseas investment exploded due to the Seohak Ant fever. After COVID-19, an investment boom in US stocks occurred among younger generations. To invest in companies like Tesla, Nvidia, and Apple, you need to convert won to dollars. In 2020, individuals' overseas stock investments were around $10 billion, but now exceed $40-50 billion annually. This isn't a temporary trend but a fundamental change in investment patterns. Investors who experience overseas stock investing don't easily return to domestic markets because US markets have much greater growth potential and diversity.
Second, companies' foreign direct investment also greatly increased. Samsung Electronics is building a $20 billion semiconductor factory in Texas, USA, and Hyundai Motor is constructing an electric vehicle factory in Georgia. LG Energy Solution is also building multiple battery factories in North America. Such large-scale overseas investments create massive dollar demand at once. Moreover, since these investments aren't one-time but multi-year projects, they structurally increase dollar demand.
Third, behavioral changes by export companies are also notable. In the past, when export companies earned dollars, they quickly converted them to won for domestic use. But recently, more are holding dollars or depositing them in overseas banks. They judge it advantageous to hold dollars expecting continued rate increases. There's also strategic thinking to secure dollar liquidity for overseas investments or M&A. These changes reduce dollar supply in currency markets, acting as upward pressure on rates.
As these structural changes accumulate, the "1,400 won range" is increasingly likely to become a new equilibrium point rather than a temporary phenomenon.
✅ Impact of High Exchange Rates on the Economy
Exchange rate increases have complex effects on various economic sectors.
First, it can be advantageous for export companies in the short term. When rates rise, export products' dollar price competitiveness increases. For example, if a Korean company exports a $10,000 product, at a 1,400 won rate they earn 14 million won, but at 1,450 won they earn 14.5 million won. They earn 500,000 won more selling the same product. In reality, major export companies like Samsung Electronics and Hyundai Motor tend to see stock price increases when rates rise. But this is a short-term effect. Long-term continued rate increases can raise imported raw material costs, increasing cost burden and potentially worsening overall profitability.
Second, industries highly dependent on imports suffer greatly. Korea depends on imports for most energy and raw materials. Oil, natural gas, and iron ore are all settled in dollars. When rates rise, import costs for these resources increase. For example, when crude oil is $80 per barrel, at a 1,400 won rate it's 112,000 won, but at 1,450 won it's 116,000 won. When refining companies' costs rise, gasoline prices eventually rise too. This leads to consumer price increases and burdens ordinary people's economy.
Third, companies with foreign currency debt face increased repayment burden. Some companies borrowed in dollars when interest rates were low. When rates rise, debt size converted to won increases. For example, a company that borrowed $100 million has 140 billion won of debt at 1,400 won rate, but 145 billion won at 1,450 won rate. That's an additional 5 billion won burden. There's precedent of some small and medium companies suffering from foreign debt during the 2008 financial crisis, so government and financial authorities are closely monitoring this.
High exchange rates have positive effects like increased exports, but also bring negative effects like price increases and increased corporate burden.
✅ Government Response and Limitations
Let's examine what the government and Bank of Korea can do to stabilize exchange rates and their limitations.
First, foreign exchange market intervention is the most direct measure. The Bank of Korea can lower rates by selling dollars and buying won using foreign exchange reserves. When rates spike, the Bank of Korea often intervenes in the market under the name "smoothing operation." But such intervention has limits. Reserves aren't unlimited, and excessive use can negatively affect national credit ratings. Also, when market forces are too strong, intervention effects are limited. Having exhausted reserves during the 1997 foreign exchange crisis is a painful memory, so the government is very cautious about currency market intervention.
Second, interest rate policy also affects exchange rates. If the Bank of Korea raises base rates, foreign investors have greater incentive to invest in Korean assets, bringing capital inflows and potentially lowering rates. Conversely, lowering rates can cause capital outflows and rate increases. But interest rates can't be decided considering only exchange rates. Domestic economy, prices, and real estate markets must be comprehensively considered. For example, raising rates now to lower exchange rates could further worsen the already difficult domestic economy. This dilemma makes it difficult to use interest rates as an exchange rate management tool.
Third, structural responses are needed. Short-term market intervention or interest rate adjustments can't stop structural won weakness trends. Fundamentally, domestic investment environment must be improved to attract foreign capital and reduce domestic investors' overseas fund outflows. This requires long-term comprehensive policies like activating corporate investment, enhancing stock market attractiveness, and fostering innovative industries. Also, securing stable foreign currency income sources through export diversification is important.
Exchange rate management has limits with only short-term prescriptions and must go together with the long-term task of improving economic fundamentals.
4️⃣ In Conclusion
The won-dollar exchange rate breaking through 1,450 won is an important signal reflecting structural changes in Korea's economy, beyond just a number change.
In the past, even when rates temporarily rose, they soon stabilized again. But this time is different. Structural changes are occurring including Seohak Ants' overseas investment fever, companies' large-scale foreign direct investment, and export companies' increased dollar holdings. As long as these factors continue, rates are unlikely to easily come down.
Experts forecasting 1,480 won, even 1,500 won, is also due to these structural changes. Of course, if the government intervenes in currency markets or global economic conditions change, rates could fall short-term. But the long-term trend is generally expected to move toward won weakness.
High exchange rates are a double-edged sword. While they can benefit export companies short-term, negative effects like rising living costs from import price increases and increased foreign debt burden are significant. Particularly for Korea, which depends on imports for most energy and food, exchange rate increases inevitably lead to price increases.
Individuals need to prepare several things. First, if planning overseas travel or study abroad, carefully check exchange rate situations. Second, rushing to buy overseas online shopping or imported goods is one method. Third, holding some dollar assets for portfolio diversification is worth considering.
Companies must more thoroughly manage currency risk. They should actively utilize hedge strategies like forward exchange contracts or currency options to prevent losses from exchange rate fluctuations. Especially companies with much foreign debt should establish risk management plans for rate increases.
The government must work on long-term structural improvements along with short-term market intervention. Intervention to stabilize currency markets is needed, but more important is strengthening domestic economic fundamentals. Innovation industries must be grown, investment environment improved, and export competitiveness enhanced. Only then can a virtuous cycle structure be created where capital doesn't flow out but rather flows in.
Ultimately, the exchange rate issue is directly connected to Korea's overall economic competitiveness, beyond simple currency market issues. Whether current high exchange rates end as a temporary phenomenon or become the new normal depends on what choices we make going forward.
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