Won remains weak despite Bank of Korea warning and record exports

South Korea's currency is experiencing an unusual decline, with the won remaining above 1,500 against the dollar for the longest stretch since the 2009 financial crisis. This persistent weakness occurs despite record current account surpluses driven by a booming export sector, particularly semiconductors.

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We will deal very resolutely with exchange rate쏠림 (imbalances). We will not tolerate it.

Analysts attribute the won's depreciation primarily to geopolitical uncertainties stemming from the U.S.-Israel-Iran conflict. This global instability is driving up oil prices and strengthening the dollar as a safe-haven asset, inevitably weakening the won. "The global foreign exchange market is exposed to war risk, and both oil prices and exchange rates are only looking at 'Hormuz,'" said Park Sang-hyun, a researcher at iM Investment & Securities, referring to the Strait of Hormuz, a critical oil chokepoint.

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The uncertainty risk related to the end of the U.S.-Iran war is currently dictating the flow of not only oil prices but also the dollar.

Despite the volatile exchange rate, the South Korean government and businesses express little concern. Some officials view the high won as a "cost of success" during the nation's economic advancement. The impact of rising import costs for raw materials is reportedly offset by the stronger competitiveness of Korean exports, led by semiconductors. However, ordinary households face a different reality. The depreciating won can trigger a cascade of price increases, affecting import costs, producer prices, and ultimately consumer prices. South Korea's consumer price inflation already hit a 2024 high in May, and further increases are expected due to oil prices and the exchange rate.

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In a situation of prolonged high oil prices, inflation is rising, simultaneously stimulating global long-term interest rates and the pressure of a strong dollar.

This situation also influences monetary policy. The high exchange rate and persistent inflation are accelerating expectations for an interest rate hike by the Bank of Korea. While a rate increase could narrow the interest rate gap with the U.S., potentially easing pressure on the won, the immediate concern is the growing burden on households already grappling with rising costs.

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The high exchange rate is a cost of success that accompanies Korea's economic leap forward.