A "decoupling" phenomenon is becoming increasingly apparent among major East Asian currencies, with each moving in different directions based on respective economic fundamentals and policy differences. However, analysis shows the Korean won has strengthened its correlation with neighboring currencies amid this trend, increasing its exposure to external volatility risks.
The Bank of Korea delivered this assessment in its "Monetary and Credit Policy Report (March 2026)" released on the 12th, emphasizing the need for close monitoring of changes in external conditions during future monetary policy operations.
According to the report, exchange rates in three East Asian economies—Japan, China, and Taiwan—are showing clear differentiation based on economic conditions and supply-demand dynamics.
The Chinese yuan is experiencing broad-based appreciation pressures. Relatively high growth rates, continued currency appreciation guidance from authorities, and net repatriation of U.S. securities investment funds are supporting yuan strength. The assessment indicates appreciation factors dominate across all three aspects: fundamentals, policy, and supply-demand.
In contrast, the Japanese yen faces intensifying depreciation pressure due to structural low growth compounded by policy uncertainty from fiscal expansion. Despite current account surpluses, the structural problem of reduced foreign currency repatriation—as the dollar retention ratio of reinvested earnings expands—is adding to depreciation pressure.
The Taiwan dollar also continues its strong depreciation trend despite solid growth, due to authorities tolerating weakness to secure export competitiveness and increased overseas investment by residents.
Notably, while decoupling progresses among major Asian currencies, correlations between the won and neighboring currencies have actually increased across the board.
According to the report, the won-yuan correlation index rose from 0.33 in the first half of last year to 0.42 in the second half. The won-yen correlation coefficient jumped sharply from 0.35 to 0.53 over the same period. The won-Taiwan dollar correlation also remains elevated at 0.57-0.58.
This means that when neighboring currencies increase volatility due to domestic factors, the impact can rapidly transmit to the won market. Paradoxically, as decoupling among Asian currencies deepens, the won finds itself in a position to absorb instability originating from any of these currencies.
Foreign holdings of domestic securities are approaching record highs amid expanding exchange rate volatility, amplifying potential risks.
As of February this year, foreign holdings of domestic bonds reached 12.5%, breaking through the 12% threshold for the first time after steadily rising from 9.4% in September 2023 to 10.1% in August 2024. Foreign equity holdings also remain near their peak at 34.1%. This raises concerns about exposure to "outflow risk"—where foreign capital could exit en masse in the event of sudden global interest rate changes or geopolitical risks.
The BOK stated, "While supply-demand factors for the won are improving due to current account surpluses exceeding expectations, volatility could expand depending on exchange rate movements in neighboring countries such as Japan," adding, "There is a need to closely monitor changes in external conditions during the conduct of monetary policy."