[Bloomberg Column] The Complex Calculus Behind South Korea’s Response to a Weakening Won

Won Plunges Despite Dollar Weakness
US Treasury Secretary Offers Rare Verbal Support
South Korea Warns Against Sharp Exchange Rate Swings and Intervenes

Daniel Moss, Bloomberg Columnist.

The US dollar is currently on a weakening trend, but not every country is benefiting from this shift. In South Korea, anxiety is rising as the value of its currency, the won, has instead plummeted. The current won exchange rate is approaching levels rarely seen outside of the 2007-2009 global financial crisis or the International Monetary Fund (IMF) currency crisis a decade earlier. During the currency crisis, South Korea had to rely on an IMF bailout, leaving deep scars. Policymakers who began their careers in the late 1990s remain highly wary of sudden capital flow reversals. Against this backdrop, the future trajectory of the exchange rate is more important than ever.

South Korea’s foreign exchange authorities are rolling out a series of measures to support the won. Over the past six months, the won has fallen about 7% against the dollar-one of the weakest performances among Asian currencies. This decline mirrors the trend of a weakening yen. The depreciation of the yen has been a major source of concern for Japan, prompting the Japanese government to intervene directly in the foreign exchange market several times since 2022.

Amid these developments, US Treasury Secretary Scott Bessent recently offered rare "verbal support" for the won, warning that excessive volatility is undesirable. Bessent’s comments triggered a rebound in the won. However, this alone does not explain the dynamics of the foreign exchange market. Just as the "Sell America" slogan that spread among investors who turned away from US assets after the White House imposed sweeping tariffs in April last year cannot fully explain the entire foreign exchange market, such simplistic views risk obscuring some important nuances at play.

The Governor of the Bank of Korea stated in his New Year’s address that the won’s value is significantly out of line with the country’s economic fundamentals. The Ministry of Economy and Finance warned foreign exchange market participants not to test the authorities’ resolve or capacity to respond. This message is interpreted as the government making it clear that it will not stand idly by in the face of sharp exchange rate fluctuations, which it has identified as a particular concern.

Nevertheless, the authorities are avoiding aggressive intervention. Instead, they are responding with verbal intervention, encouraging pension funds to sell dollars, and urging sprawling conglomerates to convert their foreign currency earnings into won. Given these circumstances, there is speculation that the Bank of Korea will find it difficult to resume the interest rate cuts that began after October 2024.

At the same time, South Korea is pursuing reforms to improve conditions for foreign investors. Last week, the government announced that, starting in July, it will allow 24-hour trading in the foreign exchange market and ease restrictions on offshore transactions, aiming to enhance the international use of the won.

These measures are intended to pave the way for inclusion in the Morgan Stanley Capital International (MSCI) developed markets index. South Korea’s current classification as an emerging market-grouped with countries like Indonesia, Brazil, and Egypt, which have relatively lower income levels-does not reflect the country’s reality today. South Korea is a robust democracy with a strong institutional foundation. In 2024, former President Yoon Suk-yeol attempted to declare martial law but failed; he was subsequently impeached and removed from office. South Korea is a major producer of automobiles, mobile phones, and televisions found worldwide, and is home to semiconductor companies leading the artificial intelligence (AI) boom. In addition, South Korea’s bond market took a leap forward last year when it was included in major global bond indices by FTSE Russell.

South Korea’s foreign exchange authorities have already begun gradually extending trading hours and have made it clear that these reforms are irreversible. However, it is hard to deny that, in pursuing these reforms, the authorities will inevitably relinquish some degree of control. Considering these circumstances and the Bank of Korea’s focus on strengthening the won, it is difficult to argue that now is the optimal time for such changes. It will not be easy for South Korea to maintain an ambiguous stance without choosing a side.

This stands in contrast to the world’s two largest economies, the United States and China, which seek to enjoy the benefits of globalization without bearing its costs. US President Donald Trump imposed tariffs on imports regardless of whether they came from allies or competitors, and views the security alliances and agreements built by previous administrations with near disdain. China, despite joining the World Trade Organization (WTO) in 2001, has been reluctant to allow the market to wield excessive influence and has imposed strict regulations across its industries. These countries, given their economic scale, have the capacity to withstand the pressures of globalization for the time being.

South Korea will have no choice but to accept greater volatility. The average daily trading volume in the foreign exchange market now reaches 9.6 trillion dollars. When South Korea requested an IMF bailout in 1997, the scale of foreign exchange market trading was incomparably smaller than it is today.

As market forces take hold, debate has arisen over who is to blame for the won’s weakness. Part of the reason lies in the investment behavior of South Korean citizens. Even as the domestic stock market posted impressive gains last year, individual investors shifted large amounts of capital into US assets. In fact, the KOSPI index surged 76% during the same period, reaching an all-time high last week.

Those who remember the collapse of the domestic financial market in 1997 have moved their funds abroad. In particular, younger generations, effectively shut out of the housing market in Seoul, are actively investing their money in both domestic and overseas financial markets. On top of this, the government’s pledge of a 350 billion dollar investment fund as part of a trade agreement with Washington has further reduced preference for the won.

South Korea is now undertaking a significant transition. At a time when much larger economies are increasingly turning away from freer markets, South Korea is seeking to elevate the international standing of its currency. This is a meaningful choice for the country. Let us hope it does not end in failure.

Daniel Moss, Bloomberg Columnist

This article is a translation by The Asia Business Daily of the Bloomberg column "South Korea Is Right to Worry About a Weakening Won."