South Korean Won Faces Structural Shift to Higher Exchange Rate, Analysts Say

The South Korean won's exchange rate against the U.S. dollar has entered a new, higher average level since March 2024, a structural shift that analysts believe will be difficult to reverse without major external disruptions. This change is primarily driven by a strengthening global dollar and a notable increase in overseas securities investments by both individual and institutional investors in South Korea.

A recent analysis by Park Hae-sik, a senior researcher at the Korea Institute of Finance, utilized a "regime-switching model" to identify structural breaks in the exchange rate's long-term equilibrium. The study found at least three such breaks since the mid-2010s. The most recent break, occurring in March 2024, has pushed the average won-dollar exchange rate to approximately 1,408.19 won, an increase of 200 to 300 won compared to previous levels.

Park's research indicates a statistically significant and close long-term relationship between the won-dollar exchange rate, the global dollar index, and South Korean investment in U.S. stocks since March 2024. At the end of April, the probability of the won-dollar exchange rate being in a "high-pressure upward phase" was estimated at around 90%. Considering the projected duration of this phase, which is approximately 10.2 months, the exchange rate is expected to remain around its current elevated level in the short term, barring unforeseen shocks.

The analysis suggests that the factors driving this shift are deeply rooted in the current global economic landscape. The sustained strength of the dollar, coupled with South Koreans' appetite for foreign investments, creates a persistent upward pressure on the won-dollar exchange rate. This sustained higher level could have significant implications for South Korea's export-driven economy, potentially impacting trade competitiveness and inflation.

“

Based on statistical methods analyzing long-term equilibrium relationships, a statistically significant and close long-term equilibrium relationship was found between the won-dollar exchange rate, the global dollar index, and domestic investors' stock investments in the U.S. after March 2024.