The trauma of the 1997 financial crisis still casts a long shadow over South Korea. A rising dollar-won exchange rate evokes memories of a time when the rate surged to nearly 2,000 won per dollar and the foundations of the economy shook.
Today’s rate—hovering around 1,470 won—is the highest since the 2009 global financial crisis, and its persistent climb has stirred fresh unease.
Research by the Hyundai Research Institute shows that South Korea’s equilibrium exchange rate rose from 1,179 won in 2002 to 1,351 won at the end of 2024.
Yet the market rate has stayed well above that level, reflecting a structural “won discount.”
This is not the result of a crisis in the mold of 1997, when short-term foreign debt flooded the system. South Korea is now a net creditor country. Pension funds, corporations and individuals hold substantial overseas assets, and that outward investment has grown steadily over the years.
What is driving the current rise is not foreign creditors pulling money out, but domestic investors actively buying dollar assets in search of higher returns.
Still, in a highly open economy built on trade, a rapid depreciation of the won carries real costs—higher import prices, increased production costs for companies, faster inflation, reduced purchasing power and, ultimately, pressure on domestic demand just as signs of a recovery begin to emerge.
Consumer prices rose 2.4 percent in November from a year earlier, the fastest pace this year, in part due to the weak won. Travelers changing money abroad now routinely face a roughly 10 percent haircut on top of the official rate. And unlike in the past, when a weaker currency could boost exports, Korea’s reliance on semiconductors and intermediate goods—tightly integrated into global supply chains—limits the traditional trade benefits of a cheaper won.
With the won stuck near 1,470, the government has launched an all-out push to engineer a reversal. The National Pension Service has been urged to extend swap lines with the Bank of Korea, expand strategic hedging and adjust its overseas investment ratios.
Regulators are scrutinizing securities firms’ foreign stock sales, and companies are being encouraged—directly or indirectly—to convert their dollar earnings into won. Six major government bodies, including the Ministry of Economy and Finance and the central bank, are involved in this unprecedented campaign. The effort straddles a fine line between stabilizing markets and interfering with them, and it risks signaling that authorities lack more effective tools to manage currency volatility.
Expecting the National Pension Service to act as a “currency firefighter” is especially fraught. The fund’s mandate rests on profitability and stability; compelling it to intervene for short-term macro policy goals could undermine public trust, especially if losses emerge. Meanwhile, the surge of individual investors into U.S. equities—more than $30.6 billion from January to November, triple last year’s total—has prompted concern from Bank of Korea Governor Lee Chang-yong. But blaming retail investors risks misdiagnosing the origins of the won’s slide.
Corporations, for their part, are holding more dollars for perfectly rational reasons: hedging exchange gains, securing liquidity for overseas investment and preparing for the roughly $350 billion in commitments stemming from U.S. tariff negotiations. Faced with such structural incentives, government carrots such as reduced policy finance rates are unlikely to meaningfully shift corporate behavior.
The exchange rate has been pushed up by a combination of cyclical and structural forces: a 40-month interest rate inversion with the United States; foreign investors taking profits in Korean equities; rising overseas investments by Korean individuals; and expanding corporate foreign direct investment.
Longer-term trends—including Korea’s slowing growth, weakening manufacturing base and rapid demographic decline—have also reduced the appeal of the won in global markets. International investors increasingly see the won as a structurally weak currency that trades below its equilibrium value, reflecting deeper concerns about the country’s economic fundamentals.
If U.S. interest rates fall next year and Korea’s exports and stock market strengthen, the won may stabilize. Deputy Prime Minister Koo Yun-cheol has pledged to balance foreign exchange supply and demand in the short term while raising national competitiveness over the long term.
But unless Korea addresses its structural weaknesses—rigid labor markets, regulatory burdens, low productivity—any relief is likely to be temporary. Dollar outflows and renewed currency spikes will remain recurring risks.
The broader exchange rate debate is ultimately a judgment on Korea’s economic strength. Exports reached a record $640.2 billion from January to November, up 2.9 percent from a year earlier, yet that headline masks vulnerabilities: strip out semiconductors and exports actually fell 1.5 percent.
The domestic economy remains fragile after prolonged stagnation, and legacy manufacturing sectors such as petrochemicals and steel are losing ground to intensifying Chinese competition. Concerns that parts of Korea’s industrial base may shift to the United States under new tariff arrangements also weigh on sentiment.
As high exchange rates become a near-permanent feature of the economic landscape, Korea’s policy orientation must change. Inflation control—not expansionary fiscal measures—should be the government’s top priority. Stimulus spending must be deployed sparingly, and fiscal tools should be redirected toward strengthening the country’s productive capacity.
Restoring confidence in Korea’s economic future is the surest path to a stable exchange rate and a fairly valued won. There was a time when earning dollars was considered an act of patriotism. That belief, it seems, is returning.
About the author: Park Won-jae holds a master’s degree in business from Aalto University in Finland and has served as Tokyo correspondent, editorial writer and economic editor at Dong-A Ilbo, CEO of Dong-A.com and chairman of the Korea Online Newspaper Association. He is currently a professor at Kyungsung University.
* This article, published by Aju Business Daily, was translated by AI and edited by AJP.
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