Rising won-dollar rate strains South Korea’s economy

The won-dollar exchange rate has remained above 1,450 won for more than 10 days since Nov. 7. As of Nov. 17, the average won-dollar rate in the Seoul foreign exchange market for this year stood at 1,415.5 won, surpassing levels seen during the 1998 financial crisis and the immediate aftermath of the 2009 global financial crisis. The concern is not just short-term fluctuations but a long-term trend, which has been steadily rising since 2021. The persistently high exchange rate is placing a heavy burden on South Korea’s economy, which relies heavily on imported commodities and energy.

Recent increases in the won-dollar exchange rate have been driven by several factors, including fading expectations of U.S. interest rate cuts, a weaker yen, and large-scale selling of domestic stocks by foreign investors. Anticipated annual investments of up to $20 billion, or about 29 trillion won, in the United States under the South Korea-U.S. tariff agreement have also contributed. Experts, however, stress that structural changes in the domestic foreign exchange market, rather than these short-term factors, are key. Growing overseas investments by individuals and institutions, as well as rising corporate direct investments abroad, are sustaining the upward trend. Net external financial assets held by South Koreans, calculated as overseas financial assets minus liabilities, reached $1.0304 trillion, or about 1,510 trillion won, at the end of June.

In the past, a rising exchange rate was considered beneficial for boosting export competitiveness. Now, however, the rate has increased to a point where its negative effects outweigh the benefits. Companies reliant on imports of raw materials and intermediate goods are facing heavy burdens, and exchange rate volatility is making it difficult to set business plans for next year. According to the Bank of Korea, prices for raw materials such as coal, crude oil, natural gas, and minerals, measured in won, have risen 80.4 percent compared with five years ago. The higher import prices caused by the rising exchange rate have also pushed up food prices, increasing financial strain on ordinary households. Last month, consumer prices rose 2.4 percent from a year earlier, marking the largest increase in 15 months and reigniting inflation concerns that had been dormant.

If high exchange rates continue to drive up prices, recovering domestic demand could be hit again, while real estate and other asset markets could be stimulated, potentially complicating monetary policy. Authorities will need to monitor price trends and implement policies to prevent exchange rate instability from spilling into the broader economy. The National Assembly, which has begun reviewing next year’s budget, must also resist pursuing expansionary spending policies that could further unsettle exchange rates and inflation.