Why Is the Won So Weak in Global Markets and What Can Be Done

The South Korean won has been struggling in global markets, and it's not hard to see why. The country's current account deficit has ballooned to over 2% of GDP, making it difficult for the central bank to intervene and prop up the currency.

A major contributor to this deficit is the country's reliance on imports, particularly in the electronics sector. The export-oriented economy is heavily dependent on global demand for products like semiconductors and smartphones.

This vulnerability to global trade has left the won exposed to shifts in international market sentiment. As a result, the currency has been particularly sensitive to changes in the global economic environment.

The Bank of Korea's (BOK) decision to keep interest rates low has also failed to boost the won. In fact, the BOK's accommodative monetary policy has only added to the country's inflationary pressures, further weakening the currency.

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The strength of the US dollar plays a substantial role in the Korean Won's depreciation, and the Federal Reserve's interest rate decisions directly influence the dollar's value.

Global inflation, particularly in energy and commodity prices, strains import-dependent economies like South Korea, which relies heavily on imports for nearly 98% of its fossil fuel consumption.

Elevated prices for crude oil, gas, and coal result in higher import bills, requiring South Korea to spend more foreign currency, increasing the supply of Won in the foreign exchange market and contributing to its weakening.

A slowdown in global economic activity or rising recession fears reduces demand for Korean exports, as South Korea is a major exporting nation, with its trade influenced by global demand for products like semiconductors.

This decline in foreign currency earnings can weaken the Won, as there is less demand for the currency from international buyers, which is a crucial factor in the Won's value.

The global economy's influence on the Won's value is significant, and it's essential to consider these external factors when analyzing the Won's weakness.

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The Korean won has been on a wild ride lately, touching its weakest level in 17 months in April 2024, falling to 1,400 per dollar. This was largely due to Middle East woes and the Federal Reserve's rate view.

The won's weakness has been a persistent issue, with it hovering above the 1,300 per dollar barrier for over a month and a half. Analysts attribute this to sluggish exports, which have resulted in the longest losing streak in the trade balance in 25 years.

The won's depreciation has significant implications, as a rate of 1,300 has only occurred three times in the past, during major economic crises. This year's trade deficit has already reached nearly $30 billion, accounting for 61.5% of the deficit posted in 2022.

The won's weakness is closely tied to the decline in outbound shipments, particularly to China, which has been slow to recover from the pandemic. The won-dollar exchange rate may remain unstable for the time being, unless demand from China and other countries recovers.

The won's performance is closely watched, with a level of 1,400 per dollar being considered a closely watched benchmark. Bank of Korea Gov. Rhee Chang-yong has said the currency is forecast to stay around that level for the time being.

The won's weakness has also been exacerbated by the continued strengthening of the US dollar, driven by concerns over the impact of US President-elect Donald Trump's new tariff policy on South Korean industries and the broader economy.

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The Won's weakness can be attributed to a combination of global and domestic factors.

Rising inflation in South Korea can erode the Won's purchasing power, making it less attractive to hold compared to currencies with more stable prices.

High levels of household debt in South Korea, with a debt-to-GDP ratio of 91.7% in the fourth quarter of 2024, can constrain consumer spending and economic activity.

The strength of the US dollar plays a significant role in the Korean Won's depreciation, with the Federal Reserve's interest rate decisions directly influencing the dollar's value.

Global inflation, particularly in energy and commodity prices, strains import-dependent economies like South Korea, increasing the supply of Won in the foreign exchange market and contributing to its weakening.

A less optimistic economic growth forecast in South Korea, such as the Bank of Korea's revised 2025 growth outlook to 0.8% from 1.5%, can deter foreign investment and lead to capital outflows.

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South Korea's reliance on imports for nearly 98% of its fossil fuel consumption makes it vulnerable to global price fluctuations, resulting in higher import bills and a weaker Won.

A slowdown in global economic activity or rising recession fears reduces demand for Korean exports, decreasing the inflow of foreign currency into South Korea and weakening the Won.

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The Won's weakness is largely influenced by trade and central bank factors. A widening trade deficit directly impacts the Won's value, increasing demand for foreign currency. South Korea recorded a trade deficit of $5.97 billion in early 2022, a significant shift from a surplus.

Capital outflows also contribute to the Won's weakness. Foreign investors have sold off South Korean stocks and bonds, leading to significant outflows, such as $4.2 billion in December 2024. This trend creates demand for foreign currency and increases the supply of Won.

The Bank of Korea's monetary policy stance can also impact market perceptions of the Won's stability. The Bank of Korea plans to lower its base rate further in 2025, acknowledging increased political uncertainties and downside risks to the economy. This accommodative stance can signal a willingness to prioritize domestic economic conditions over immediate currency strength, potentially leading to further depreciation.

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A widening trade deficit can have a significant impact on a country's currency value, like the Won in South Korea, which recorded a $5.97 billion deficit in early 2022.

This deficit creates a greater supply of Won relative to foreign currency, leading to depreciation. The Won's value decreases as the demand for foreign currency increases.

Capital outflows also play a crucial role in weakening a country's currency. In South Korea, foreign investors sold off stocks and bonds, resulting in a $4.2 billion outflow in December 2024.

Domestic investors increasing their overseas investments contribute to this outflow, further exacerbating the Won's weakness. This trend creates demand for foreign currency and increases the supply of Won, putting downward pressure on its value.

A country's foreign exchange reserves serve as a buffer against external shocks, providing liquidity for external obligations. South Korea's foreign exchange reserves increased to $411.3 billion in July 2025, but they have shown mixed movements.

A significant decline in these reserves can signal economic vulnerabilities or a reduced capacity to intervene in the foreign exchange market, which could further weaken market confidence in the Won. The Bank of Korea holds these reserves to maintain intervention capacity and cope with shocks.

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The Bank of Korea's interest rate differential with other major central banks can have a significant impact on the Won's value. In November 2024, the US Federal Reserve's interest rate range was 4.24%-4.5%, while South Korea's rate was 3.00%, creating a gap that encourages investors to move capital to the US.

This capital outflow reduces demand for the Won, contributing to its depreciation. The Bank of Korea's accommodative monetary policy stance, aimed at supporting growth and stabilizing inflation, can signal a willingness to prioritize domestic economic conditions over immediate currency strength.

The Bank of Korea may lower its base rate further in 2025, acknowledging increased political uncertainties and downside risks to the economy. This move can lead to further depreciation of the Won.

In the second quarter of 2024, South Korea's foreign exchange authorities sold a net $5.80 billion for market intervention, typically by selling foreign currency to buy Won.

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