Concerns are growing that the won-dollar exchange rate in the 1,500 won range could become entrenched as a new normal amid compounding risks weighing on the Korean economy, including the prolonged Middle East war, surging international oil prices, and foreign capital outflows. On the 30th, the won-dollar exchange rate closed at 1,515.7 won on the Seoul foreign exchange market, rising 6.8 won from the previous day. The dollar index, which measures the dollar's value against six major currencies including the euro, yen, and pound, also climbed for five consecutive days, surging well past the 100 level.
The problem is that the won's depreciation has been far steeper than that of other countries' currencies. The average exchange rate from the beginning of this month through the 27th stood at 1,489.3 won, surpassing the 1,488.7 won recorded in March 1998 during the foreign exchange crisis, making it the fourth-highest monthly average on record. The won's depreciation of 4.7% was the largest among major currencies, exceeding the euro (-2.6%), the Japanese yen (-2.5%), the British pound (-1.6%), and the Swiss franc (-3.7%). The weekly average rate last week reached 1,503.4 won, breaching the 1,500 won level on a weekly basis for the first time in 17 years.
There is concern that the 1,500 won exchange rate may not remain a temporary phenomenon caused by external shocks but could become a "constant" that erodes the Korean economy's growth engine. On the same day, the Korea International Trade Association (KITA) warned in an exchange rate report that if the Iran conflict spreads across the entire Middle East and the Strait of Hormuz blockade persists, the quarterly average exchange rate could surge to 1,530 won. Shin Hyun-song, the nominee for Bank of Korea (BOK) governor, stated upon his arrival in the country that he "feels a weighty sense of responsibility in this grave situation," vividly illustrating the desperate reality of the Korean economy facing a high exchange rate shock.
The won's freefall is not attributable to the Middle East war as a single variable. The 1,500 won exchange rate is an "honest mirror" that directly reflects the self-portrait of a Korean economy vulnerable to external shocks. Although all countries face the same uncertainty, the fact that the won's depreciation and the KOSPI's decline are notably steeper than those of major competitors may be uncomfortable proof that Korea's economic fundamentals are at a "comparative disadvantage." What matters most now is the government's accurate assessment of the current reality and its will to execute policies for structural improvement. The government must accelerate restructuring of oversupply industries such as petrochemicals and steel, and hasten labor and regulatory reform to fundamentally transform the country into one with a stronger economic constitution. Measures to earn the trust of overseas investors must also be swiftly devised, including expanding currency swap arrangements with advanced economies, strengthening fiscal soundness, and coordinating balanced monetary and fiscal policies.