South Korea confronts risks as currency tensions rise

Since the 2008 global financial crisis, a currency war effectively lasted seven years. The U.S. Federal Reserve cut its benchmark rate to 0.1% in December 2008 and did not exit the zero-rate period until December 2015. During that period, major U.S. competitors, including China and Japan, cut interest rates and increased liquidity to stimulate their economies, deliberately devaluing their currencies to enhance export competitiveness.

The currency war’s severity led the Group of 20 (G20) to hold a finance ministers and central bank governors meeting in Gyeongju, North Gyeongsang Province, to curb excessive currency adjustments. Proposals even called for reducing current account surpluses.

Signs suggest a new currency war may be emerging. The Fed cut rates last month for the first time in about nine months and hinted at further reductions. China has kept rates steady, but analysts expect cuts by year-end amid deflationary pressures and potential trade tensions with the United States. Economies under stress often turn to interest rate cuts before other measures.

If a new currency war erupts, South Korea has limited room to respond. The won has already fallen sharply. In 2010, when authorities tried to strengthen it, the average exchange rate was about 1,150 won per dollar. This year, the won has surpassed 1,430 per dollar. If the trend continues, the annual average could exceed the 1998 level of 1,394.97, recorded after the IMF crisis. Meanwhile, the dollar index, which tracks the U.S. dollar against six major currencies, has fallen about 9% since the start of the year. Despite a weaker dollar, the won’s steep decline highlights its vulnerability.

A weaker won can boost exports. After the IMF crisis, South Korea leveraged currency depreciation to improve export competitiveness, aiding economic recovery. Today, however, companies may not welcome the advantage, as key trading partners are raising tariffs.

Inflation is another concern. A higher exchange rate increases import costs, raising domestic companies’ raw material expenses. These costs eventually feed into consumer prices. A falling currency may also drive investors into real estate. Even if a new currency war arises, South Korea faces substantial risks. Limited fiscal space restricts stimulus options, and constraints on monetary policy complicate crisis response.

Analysts say the won’s sharp decline reflects expectations of further U.S. rate cuts and concerns over South Korea-U.S. tariff talks. Domestically, last December’s martial law incident increased uncertainty.

More fundamentally, it is necessary to reconsider whether the Bank of Korea acted swiftly during past interest rate hikes. As the zero-rate era ended and global rates rose, the central bank faced criticism for acting too slowly, possibly under political pressure. That sentence is already clear, professional, and AP-style compliant. A more proactive approach might have slowed the won’s decline. As the economy weakens, the central bank’s role grows more critical, underscoring the need to protect its independence.