Why the pain of a weak won feels sharper than before

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Why the pain of a weak won feels sharper than before

Published: 02 Dec. 2025, 00:03

Audio report: written by reporters, read by AI

Cho Min-geun

The author is the business and industry news editor at the JoongAng Ilbo.

For Korea, a high exchange rate has long been part of daily life. As a country that lives off exports and must earn dollars as a non-reserve-currency economy, the won has always faced structural pressure. Veteran economic officials often describe this posture as “external balance outweighs internal balance,” meaning current account stability and exchange rate management matter more than inflation or employment. The trauma of the 1997 Asian financial crisis and the 2008 global meltdown only hardened that mindset.

Employees monitor stock and currency movements at Hana Bank’s headquarters in central Seoul on the afternoon of Dec. 1. [YONHAP]

Perhaps this institutional memory dulled policymakers’ senses. As political turbulence from last year's Dec. 3 martial law crisis eased earlier this year, the urgency faded from officials’ expressions, even as the won hovered around 1,400 per dollar. With the current account in surplus and volatility declining, many felt the risk of a major disruption was low. Some officials quietly suggested that a weak won would support exports, making intervention unnecessary. This was how the phrase “the 1,400 won level is the new normal” entered policy circles.

But by October, something shifted. Despite a weakening dollar, the won fell further, pushing the exchange rate higher in an unusual divergence. In purchasing power terms, the currency has dropped to its weakest level since the global financial crisis. When the rate pushed past levels seen during the martial law episode, threatening to breach 1,500 won, the mood changed abruptly. The fire reached the foreign exchange authorities’ doorstep.

The first response came from the Bank of Korea. After holding interest rates steady in November, the central bank also backed away from signaling an eventual rate cut. Its concern was the combination of housing market instability and a rapid tilt in exchange rate expectations. Gov. Rhee Chang-yong said the exchange rate “is not creating instability in the foreign exchange market,” yet warned that the one-way movement could push inflation significantly higher. With the usual two-to-three-month lag between exchange rate spikes and consumer prices, market analysts expect no rate cuts, at least until the first half of next year. Currency anxiety has tied the hands of monetary policy.

Responsibility has now shifted to the government. Deputy Prime Minister and Finance Minister Koo Yun-cheol convened major exporters and delivered a message that, in essence, asked them to release more of their earned dollars into the market. He also signaled that the government may coordinate with the National Pension Service (NPS), the largest institutional presence in the foreign exchange market, to stabilize the won.

The reasoning is straightforward. A rising exchange rate reflects more demand for dollars than supply. Exporters are the primary suppliers, yet the government believes firms have become reluctant to convert earnings into won. At the same time, demand for dollars has surged due to retail investors’ overseas stock purchases and the NPS’s expanded global investment portfolio. Pressure, from the government’s perspective, must be applied on both sides.

Short-term measures may be unavoidable if the goal is to prevent the won from breaking past 1,500. Yet there is disappointment in that stronger macroeconomic vigilance earlier in the year could have mitigated the current scramble. Exporters did not suddenly start hoarding dollars, nor did retail investors and the pension fund abruptly accelerate overseas investments.

Meanwhile, the traditional benefits of a weak currency have been fading while the costs have grown. For years, a moderately weak won enjoyed broad support because it helped sustain a virtuous economic cycle. Korean companies brought dollar earnings home, built factories and expanded investment. New jobs boosted household income and supported domestic consumption, which in turn kept small businesses afloat.

That cycle has weakened dramatically. As protectionist policies in the U.S. and elsewhere expanded, Korean firms found it more efficient to increase overseas investment rather than repatriate profits. Even when parking money temporarily, keeping funds abroad yielded higher returns because of global interest rate conditions. On top of that, the results of the recent Korea–U. S. tariff negotiations — which committed Korean firms to large-scale investments in the United States — sharply increased corporate demand for dollars. As a result, even during export booms, job growth has been muted and domestic consumption has struggled as inflation eats into household budgets.

Bank of Korea Gov. Rhee Chang-yong speaks at a press briefing at the central bank’s headquarters in central Seoul on Nov. 27, explaining the decision to hold interest rates steady. [JOINT PRESS CORPS]

The same logic applies to the surge in overseas investment by retail investors and the NPS. In their view, foreign markets offer stronger growth and greater economic stability than the domestic environment. Korea’s structural low-growth trajectory, which lags its potential growth rate, and widening fiscal deficits aimed at stimulating the economy have only strengthened expectations that the won will weaken further over time.

The long-term remedy must correct the “expectation bias” driving these imbalances. Korea needs policies that restore macroeconomic stability, including tighter management of fiscal risks. It also needs measures that revive the virtuous cycle in which export growth translates into domestic investment and employment. Without such structural adjustments, Korea’s entrenched weak won environment risks becoming not a “beggar-thy-neighbor” strategy but a “beggar-thy-own-people” outcome.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.