OPINION: The won's slide is about confidence, not crisis

The won traded around 1,360 per U.S. dollar when the Lee Jae Myung government took office in early June 2025. It weakened into the 1,470s in November and the 1,480s in December. Although it has since eased back to the 1,440s, the exchange rate — along with real estate — has emerged as one of the most visible risk factors confronting the new administration. 

A high exchange rate itself is not new. The won remained weak throughout the Yoon Suk Yeol government. What requires explanation is why, under the Lee government, the depreciation has been framed as a sudden surge — and why it has reignited fears of a foreign-exchange crisis. 

Several explanations have been offered: the widening U.S.–South Korea interest-rate gap, money-supply growth linked to expansionary fiscal policy, prolonged export weakness and domestic political instability. Yet most of these factors predate the current administration. The Bank of Korea’s rate cuts and the resulting rate gap began under Yoon, and export weakness has been a persistent issue. Blaming money-supply growth on a government barely six months into office is also a stretch. 

Some have singled out so-called “Seohak ants” — South Korean retail investors buying overseas stocks — as a culprit. But the KOSPI has surged under the Lee government, weakening the claim that capital flight by retail investors is driving the won lower. That leaves political and economic uncertainty — and declining confidence in policy direction — as the more persuasive explanation. 

Context matters. South Korea holds net dollar assets of roughly $1.3 trillion, including more than $400 billion in foreign-exchange reserves and over $900 billion in net external dollar assets. These figures include overseas stock holdings by retail investors. This is nowhere near the 1997–98 situation, when dollars were scarce. A foreign-exchange crisis driven by liquidity shortages is, for now, effectively off the table. 

Nor is there evidence of a fundamental rupture in the won–dollar relationship. The dollar had been strengthening even before the U.S.–South Korea rate gap widened, and it has remained strong against major currencies such as the euro and the yen. Still, the late-2025 jump from the low-to-mid 1,400s into the high 1,400s — flirting with 1,500 — was problematic. It reflected an episode of “overshooting,” in which small changes triggered outsized market reactions. That points to shortcomings in short-term management rather than a structural collapse. 

Three factors stand out. 

First are political and economic tensions surrounding the change of government. Some market participants appear to view the new policy direction as weakening fundamentals and have positioned for a softer won. Uneven media coverage of the exchange rate and a rise in domestic dollar-deposit balances suggest a shift in sentiment toward defensive positioning. 

Second is perceived instability among economic authorities, particularly the so-called F4 — the deputy prime minister and finance minister, the Bank of Korea governor, the Financial Services Commission chairman and the Financial Supervisory Service chief.

Doubts persist about both expertise and coordination. Bank of Korea Gov. Rhee Chang-yong is nearing the end of his term, while the other three face criticism for limited experience in international finance. As a result, short-term measures have had limited impact.

Controversies over retail investors, the National Pension Service’s hedging practices and pressure on major exporters to sell dollars have done little to stabilize expectations. In currency markets, credibility matters more than reserves: when authorities’ words carry weight, they rarely need to deploy “ammunition.” 

Third are longer-term structural issues, which call for a broader perspective — including lessons from Japan. Japan once had its own version of retail investors, the so-called “Mrs. Watanabe.” On April 1, 1998, it overhauled its foreign-exchange regime through the Foreign Exchange and Foreign Trade Control Law, sharply liberalizing capital transactions and easing restrictions on overseas investment. 

Those “Mrs. Watanabe” yen-carry trades did contribute to yen weakness. But Japan also gained something else: as the yen became more internationalized and trading deepened, volatility declined. With yen bonds, spot and futures trading occurring in real time in markets such as New York and London, exchange-rate swings moderated. When carry-trade returns rose, they often helped stabilize the currency rather than destabilize it. 

In an era of financial globalization, there is no realistic way to block retail investors’ overseas investment. The more constructive approach is to sharply ease — or even abolish — foreign-exchange regulations so retail flows help deepen the market and potentially exert stabilizing effects. That would be a step toward internationalizing the won. 

South Korea has yet to join the group of 28 countries with fully convertible currencies. Aside from limited liberalization imposed by the International Monetary Fund after the 1998 crisis, its foreign-exchange market has remained largely closed for nearly three decades.

The result is a distorted structure, exemplified by the outsized role of the offshore non-deliverable forward market. This also helps explain why South Korea remains excluded from the MSCI developed-market index — a constraint that ultimately undermines ambitions such as “KOSPI 5000.”

*The author is a columnist for the Aju Business Daily.

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