Recently, the won-dollar exchange rate has soared to unprecedented heights, raising concerns about economic repercussions. As of the 27th of last month, the exchange rate surpassed the 1,480 won mark, reaching its highest level since the 2009 global financial crisis. This is analyzed as a result of intertwined domestic and international economic conditions and political uncertainties.
On that morning, the won-dollar exchange rate rose to 1,486 won, breaking the record since March 16, 2009, when it reached 1,488.5 won. After the Federal Open Market Committee (FOMC) meeting on the U.S. benchmark interest rate, the exchange rate had maintained the 1,450 won level for four consecutive trading days, then surpassed 1,460 won on the 26th, continuing its sharp rise on this day. With the entry into the 1,500 won range imminent, market tension is escalating.
Why Is It Rising?
The upward trend in the exchange rate began in earnest after the election of U.S. President Donald Trump. President Trump's protectionist trade policies, particularly the imposition of universal tariffs on all imports and high tariffs on products from China and Mexico, acted as major factors promoting the strength of the dollar. Consequently, with expected inflation in the U.S., the Federal Reserve (Fed) indicated a policy to slow down the pace of interest rate cuts. This further solidified the dollar's strength, resulting in a deepening weakness of the won against major global currencies.
Domestic circumstances also influenced the sharp rise in the exchange rate. Political uncertainties compounded by the martial law situation, the presidential impeachment crisis, and the impeachment of Acting Prime Minister Han Deok-su intensified the won's weakness. The Democratic Party's impeachment of Acting Prime Minister Han Deok-su dampened both domestic and foreign investor sentiment, accelerating the decline in the won's value. As a result, concerns are growing in the market that economic uncertainty will be prolonged.
Government Response
The government acted urgently to counter the rapid rise in the exchange rate by holding emergency meetings. At a meeting attended by Deputy Prime Minister for Economic Affairs Choi Sang-mok, Bank of Korea Governor Lee Chang-yong, and Financial Services Commission Chairman Kim Byung-hwan, it was announced that market conditions would be monitored 24 hours a day and that decisive stabilization measures would be taken if excessive market imbalances occurred. However, voices pointing out the limitations of verbal intervention have also emerged. The prevailing view is that the foreign exchange authorities are unlikely to intervene by actually deploying foreign exchange reserves. As of the end of November, foreign exchange reserves stood at approximately $410 billion, and the government is maintaining a cautious stance to preserve these reserves.
Repercussions: Inflationary Pressure and Foreign Capital Outflows
The sharp rise in the exchange rate is having various economic impacts. These include domestic inflationary pressure due to rising import prices and deteriorating corporate profitability caused by increased costs. In particular, domestic-oriented companies are struggling as they cannot reflect the burden of rising raw material prices in product prices. The conventional notion that exchange rate increases benefit export companies does not apply to large corporations with a high proportion of local production.
These economic pressures also affect financial markets. If the exchange rate continues to rise, foreign investors are likely to withdraw from domestic stock and bond markets due to concerns over exchange losses. Additionally, there is a possibility of a downgrade in the country's credit rating. However, global credit rating agencies such as Moody's evaluate the Korean economy from a long-term perspective, so the likelihood of an immediate credit rating downgrade is considered low.
Experts predict that won-dollar exchange rate instability is likely to persist until the first quarter of 2025. It is expected that the won's weakness will continue until the impeachment phase is resolved and the global economic situation stabilizes. Accordingly, economic uncertainty is expected to persist, requiring cautious responses from the government and foreign exchange authorities.
The rising exchange rate also directly affects the public. The increased cost of remittances for overseas students and higher expenses for overseas travel are adding to everyday burdens. It is a regrettable reality that political controversies are causing economic repercussions that impact the public. Voices are growing louder, hoping that politics and the economy will find their proper footing in the new year.
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