The won-dollar exchange rate is surging to its highest level since the global financial crisis, as the prolonged Middle East war, rising crude oil purchase costs, foreign investor outflows from Korean stocks, and dollar accumulation by large corporations occur simultaneously. Whether the Donald Trump administration will demand additional US investment in the process of imposing a new tariff next month to replace reciprocal tariffs is also a major variable for the exchange rate. On top of this, with forecasts emerging that the US—where employment is stable but only prices are rising—could raise its base rate within the year, the won-dollar rate has fallen into a crisis of entering the 1,600-won range for the first time in 28 years since the foreign exchange crisis. If the won-dollar rate rises too quickly, import prices will soar, putting the Bank of Korea at a crossroads for a rate hike for the first time in three years. If the US and Korea attempt monetary tightening, both countries' stock markets could undergo substantial corrections, led by sectors such as semiconductors that have surged.
US Signals Tariffs of 12.5% or More, Compounded by Prolonged Middle East War... Won-Dollar Rate at Highest Since Financial Crisis
On the 4th, just after the June 3 local elections ended, the won-dollar exchange rate suddenly surged in the Seoul foreign exchange market. For the first time in 17 years since March 10, 2009, it exceeded 1,530 won from the early part of the session, and afterward showed no sign of easily falling. It was the first time the won-dollar rate had surpassed 1,530 won intraday since March 31 this year.
The won-dollar surge that day was triggered by the US Trade Representative's (USTR) announcement of a new tariff plan on the 2nd. The USTR said it plans to impose an additional tariff of 10% or 12.5% next month on imports from 60 economies that have failed to block trade in goods produced with forced labor. Korea was included in a group of 54 economies that failed both to introduce and effectively enforce import bans on goods produced with forced labor, citing salt-farm slavery and illegal fishing, making it subject to the 12.5% tariff. The group subject to 12.5% rather than 10% includes Korea, as well as Australia, Brazil, China, Japan, Russia, the United Kingdom, and Vietnam. Only six economies—Canada, Ecuador, the European Union (EU), Indonesia, Mexico, and Pakistan—are subject to the 10% tariff. If Korea is additionally saddled with being labeled an "overproduction" country here, the tariff rate could exceed the 15% agreed upon last year.
Earlier, the USTR launched a Section 301 investigation under trade law against 16 economic entities, including China, the EU, Korea, Japan, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Vietnam, Taiwan, Bangladesh, Mexico, and India, starting March 11 this year. This came with the plan to secure a revenue source to replace reciprocal tariffs and fentanyl tariffs after the US Supreme Court ruled on February 20 that those based on the International Emergency Economic Powers Act (IEEPA) were unlawful. Section 301 of trade law gives the US administration the authority to impose tariffs against unfair, unreasonable, or discriminatory actions by foreign governments. The USTR also launched a separate Section 301 investigation related to products made with forced labor on March 12.
Contrary to President Trump's assurances, the US and Iran failed to conclude ceasefire negotiations and began to use force again, which also became a negative factor for the exchange rate. In addition, the increased import price burden on Korea, as international oil prices rose day after day amid Middle East uncertainty, was reflected in the exchange rate's rise. The one-month won-dollar contract was already trading higher than 1,533 won in the offshore New York non-deliverable forward (NDF) market on the 3rd, before the Seoul foreign exchange market opened.
As the situation grew serious, Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol attempted verbal intervention during trading on the 4th. That morning, Koo held a market situation review meeting with Financial Supervisory Service Governor Lee Chan-jin, Bank of Korea Governor Hyun Song Shin, and Financial Services Commission Chairman Lee Eok-won at the Government Complex Seoul, saying, "We are closely watching the foreign exchange market," and "If necessary, we will take immediate action against excessive herding." Unfortunately, Koo's remarks had no effect whatsoever in the market.
The exodus of foreign investors from the Korean stock market also became a chronic crisis signal for the foreign exchange market. Foreigners sold off stocks in the securities market for an astonishing 20 consecutive trading days from the 7th of last month to the 5th of this month. During this period, cumulative net selling reached 81.2389 trillion won. Expanding the period from the start of this year to the 5th of this month, the figure grows to 119.0517 trillion won. On the 5th, foreigners pulled out once more due to the Broadcom effect, following the chipmaker's second-quarter results that fell below market expectations, shaking the foreign exchange market. Broadcom did not raise its annual artificial intelligence (AI) chip revenue forecast when it announced earnings after the New York stock market closed on the 3rd. On this news, the KOSPI plunged 5.54% on the 5th, led by semiconductor stocks such as Samsung Electronics (005930.KS) (-6.40%) and SK hynix (000660.KS) (-9.92%).
Foreigners Sell for 20 Straight Days, Dumping 120 Trillion Won and Fleeing KOSPI... Koo Yun-cheol's Verbal Intervention Has 'Zero' Effect
As negative factors such as tariffs, war, prices, and foreign outflows poured in one after another, the won-dollar rate immediately surpassed 1,540 won intraday in the 4th's night trading. Having stayed in the 1,500-won range for 13 consecutive trading days since the 15th of last month, it set the longest record since the 49 consecutive trading days during the foreign exchange crisis from late December 1997 to early March 1998. It had already surpassed the records of 9 consecutive trading days from March 26 to April 7 this year, just after the Middle East war broke out, and 11 consecutive trading days during the financial crisis from February 24 to March 10, 2009.
The won-dollar rate continued its upward trend on the 5th, closing daytime trading at 1,539.1 won. Even the dollar cash buying rate at bank exchange counters in Incheon International Airport surpassed 1,600 won the same day. Koo also said at an emergency economic headquarters meeting on the 5th, "We will respond with particular vigilance to the recent increased volatility in the financial and foreign exchange markets and the difficulties in livelihood prices." The foreign exchange market again showed movements that seemed to disregard Koo's remarks that day.
In the night trading spanning the 5th into the 6th, the won-dollar rate's rise grew steeper. In the Seoul foreign exchange market's night trading on the 6th, the won-dollar rate closed at 1,559.0 won. At one point intraday it soared to 1,561.5 won, the highest in 17 years and 3 months since March 6, 2009 (1,597.0 won), during the global financial crisis.
What poured oil on Korea's foreign exchange market overnight was the US May nonfarm payrolls report. That day, the US Labor Department said May nonfarm employment increased by 172,000 from April. This was more than double the market forecast of 80,000. The Labor Department also revised up job growth for March and April by 29,000 and 64,000 respectively, for a total of 93,000. The May unemployment rate was 4.3%, maintaining the same level as April.
As the US employment situation proved all too stable even amid war, financial markets began to waver. In the New York stock market on the 5th, the Dow Jones Industrial Average (-1.35%), the Standard & Poor's (S&P) 500 (-2.65%), and the Nasdaq Composite (-4.18%) all fell as risk-averse sentiment spread. Semiconductor stocks that had risen sharply recently—Nvidia (-6.20%), Broadcom (-7.92%), and Micron (-13.25%)—were particularly hit hard. The Philadelphia Semiconductor Index also plunged 10.26%.
Bitcoin, the top cryptocurrency by market capitalization, fell below $60,000 at one point intraday. This was the lowest since November 2024, when the crypto-friendly President Trump won re-election. Compared to the record high of $126,210 set on October 6 last year, it had fallen 52.7% in eight months. The decline was also affected by crypto-accumulating company Strategy's recent sale of bitcoin and outflows from related exchange-traded funds (ETFs).
US Faces Severe Inflation but Too-Stable Employment... Probability of Rate Hike Within the Year Tops 70%
The US employment outperformance heightened the possibility of monetary tightening by the Federal Reserve (Fed) within the year, striking even Korea's foreign exchange market. When the returns on dollar-denominated assets rise, the value of won-denominated assets inevitably falls relatively. Even now, the US base rate is 3.50–3.75%, a full 1.25 percentage points higher (on the upper-bound basis) than Korea's 2.50%. As the US, alarmed by surging prices, hastily withdrew the liquidity it had released during the COVID-19 pandemic, Korea-US rates reversed in July 2022, and this structure has been maintained until now.
With favorable employment indicators coming one after another, Wall Street is leaning toward the view that the Fed will focus its monetary policy on price stability rather than labor market stimulation for the time being. In this regard, US employment information company Automatic Data Processing (ADP) also said in a report on the 3rd that private employment in May rose by 122,000 from April. This was higher than the market forecast of 117,000. Employment information firm Challenger, Gray & Christmas also tallied in a report on the 4th that US employers' total layoff announcements from January to May this year decreased 7% from the same period last year. The Fed also explained in its June economic conditions report (Beige Book) published on the 3rd that "a 'low-hiring, low-firing' trend continued in most districts," and that "hiring was notable in the manufacturing sector."
Unlike employment, US prices continue to show an unstable trend. The US personal consumption expenditures (PCE) price index, which the Fed uses as its monetary policy reference, rose 3.8% year-on-year in April, the highest since May 2023. The core price index, excluding volatile food and energy, also rose 3.3%, the highest since October 2023. The inflation rate the Fed targets as a policy goal is 2.0%.
As inflation concerns grew, the yield on 30-year US Treasury bonds, which serves as a benchmark for US mortgages and prime corporate bonds, again broke through the psychological resistance line of 5.0% intraday on the 5th. The 10-year yield, the benchmark for the global bond market, also closed above the psychological resistance line of 4.5%. The yield on the policy-sensitive 2-year US Treasury bond closed at 4.16%, up 0.11 percentage points, the highest level since February last year.
As bond yields rose, the price of gold—a safe asset like bonds but bearing no interest—fell sharply. The same day on the New York Mercantile Exchange, gold futures for August delivery closed at $4,365.3 per troy ounce, down 3.1% from the previous trading day. With this, gold futures prices, which had risen to $5,000 per troy ounce earlier this year, gave back all of their gains.
According to the Chicago Mercantile Exchange's (CME) FedWatch Tool, the federal funds rate futures market on the 5th priced in a total 71.1% probability that the Fed would raise its base rate by the end of this year. This was a sharp rise from 50.5% the previous day. The probability of a rate freeze fell from 47.4% to 27.9%, and the probability of a rate cut fell from 2.2% to 1.0%. Although Fed Chair Kevin Warsh took office at the White House in Washington, DC on the 22nd of last month amid expectations for rate cuts, the market believes he will not be able to push through President Trump's wishes right away.
Vulnerable to Currency Volatility as an Externally Dependent, Non-Oil-Producing Economy... Dollar 'Ebb Tide' Possible if US Raises Rates
Of course, currency weakness against the dollar is not a phenomenon appearing only in the Korean won. Recently, the dollar's value has strengthened against most currencies due to expectations for the end of the rate-cutting cycle, the spread of safe-asset preference amid the prolonged Middle East war, the surge in dollar-settlement demand due to high oil prices, and US economic exceptionalism. On the 5th, the dollar index (DXY), which reflects the dollar's value against six major currencies, recorded 100.07 on the London ICE Futures Exchange, surpassing 100 for the first time in two months since April 3. The dollar index is an index that measures the dollar's current value after setting the dollar's value at 100 in March 1973, when the gold standard of the Bretton Woods system ended and the floating exchange rate system was introduced. The currencies the dollar index compares against include the EU euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
That said, the recent plunge in the won's value cannot be seen as a phenomenon shared by all countries worldwide. This is because the won's decline has been particularly larger than other currencies. Given Korea's energy supply structure, which imports all of its crude oil, the national economy itself is inevitably more vulnerable to Middle East shocks than other countries. The characteristics of a highly externally dependent economy also make the Korean market more sensitive to President Trump's tariff policy. The fact that large corporations, anticipating a strong dollar even amid the semiconductor boom, are not easily releasing US currency into the market is another factor in the won-dollar supply-demand imbalance.
For now, Korea's foreign exchange reserves are assessed as being at a level capable of weathering the crisis to some extent. According to the Bank of Korea on the 4th, Korea's foreign exchange reserves at the end of last month stood at $426.99 billion (about 649 trillion won), a decrease of $880 million from the end of April. Korea's foreign exchange reserves, at $427.9 billion as of the end of April, rank 12th in the world. Dollar reserves are largest in the following order: China ($3.4105 trillion), Japan ($1.383 trillion), Switzerland ($1.0823 trillion), Russia ($758.7 billion), India ($690.7 billion), Taiwan ($602.5 billion), Germany ($599.2 billion), Saudi Arabia ($494.8 billion), Italy ($456.1 billion), France ($449.4 billion), and Hong Kong ($442.1 billion).
The problem starts from there. With no telling when the Middle East war will end, if the Fed suddenly raises rates as well, foreign investment assets could flow out even more rapidly. If holding dollar assets alone can guarantee an annual return of 4–5%, there is no need to take risks in the volatile Korean market. Even if the price of a 1,500-won stock in the KOSPI market rises 33.3% to 2,000 won, if the won-dollar rate rises from 1,500 won to 2,000 won in the meantime, the money a foreigner withdraws is ultimately the same 1 dollar.
In addition, the listings of US SpaceX, scheduled for the 12th, and of Anthropic and OpenAI, targeting the second half of the year, are expected to put additional burden on Korea's foreign exchange market. All of these are companies with the potential to become top-10 US-listed companies by market capitalization upon their initial public offerings (IPOs). If Korean investors' interest in the New York stock market grows through these three companies, dollar outflows could gain momentum once again.
Currently, many experts are keeping the upper bound of the won-dollar rate open to above 1,600 won in the short term. If the won-dollar rate surpasses 1,600 won, it would be the first time intraday in 17 years since March 2, 2009 (1,613.0 won), and on a closing basis in 28 years since March 23, 1998 (1,615.0 won). Now the market's attention is focused on the Fed's Federal Open Market Committee (FOMC) regular meeting on the 16th–17th, the first to be chaired by Chair Warsh.
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