Won Weakens to Crisis Levels Amidst Geopolitical Fears and Foreign Sell-offs

The South Korean won is experiencing a sharp decline, hitting lows not seen in over a decade and even approaching levels comparable to the 1997 Asian financial crisis and the 2008 global financial crisis. On July 6, the dollar-won exchange rate surged to 1561.5 won during intraday trading, the highest since March 6, 2009. The average exchange rate for the second quarter of 2024 also marked the highest since the first quarter of 1998, reaching 1491.0 won.

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The semiconductor industry-focused rebalancing is not showing strong signals of completion.

This depreciation is particularly pronounced when compared to other major currencies. The won lost 3.48% of its value against the dollar in a single week, significantly more than the Japanese yen (-0.65%) and the Taiwanese dollar (-0.55%). Analysts attribute this trend to a confluence of factors, including heightened concerns over oil prices and inflation stemming from the Israel-Iran conflict, and substantial sell-offs by foreign investors. The prolonged tight monetary policy stance of the U.S. Federal Reserve, driven by geopolitical instability, is also a key driver, increasing the dollar's strength and fostering risk aversion that devalues the won.

Adding to the pressure, foreign investors have offloaded a net of 11.9 trillion won in the stock market this year. This outflow exacerbates the weakening won, potentially creating a negative feedback loop where a falling currency prompts further foreign selling due to exchange rate losses. Furthermore, a rise in overseas investments by both domestic individuals and corporations is draining dollars from the economy. Historically, a trade surplus would bolster the won, but the currency now appears more susceptible to the movements of financial capital.

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Individuals and corporations' overseas investments are continuing, with dollar outflows reaching a level close to the current account surplus.

Despite these pressures, financial authorities have intervened verbally, but these measures have proven insufficient to stabilize the currency, especially in overnight trading. The government has reiterated its stance against excessive volatility. Experts predict that the high exchange rate environment, hovering around 1500 won per dollar, could persist, necessitating a focus on supporting those bearing the cost of this economic shift.

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There is no easy short-term solution, and the high exchange rate around 1500 won per dollar is expected to last longer than anticipated.