The real cause behind the surge in exchange rate

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The real cause behind the surge in exchange rate

Published: 28 Nov. 2025, 00:02

Audio report: written by reporters, read by AI

Lee Sang-ryeol

The author is a senior editorial writer at the JoongAng Ilbo.

Judging only by the rapid depreciation of the Korean won, the economy appears to be in crisis. The won-dollar rate has climbed above the 1,450 won level only three times: during the 1997–98 foreign exchange crisis, during the 2008–09 global financial crisis and after the Dec. 3 emergency martial law declaration. Now it has happened again, with the won closing at 1,465.6 on Nov. 26. Yet the nature of today’s situation is different. In the past, economic crises pushed the rate upward. Today, the rising exchange rate itself is driving the economy into danger.

A screen at a Hana Bank dealing room in central Seoul shows the won-dollar exchange rate alongside the Kospi on Nov. 27. [YONHAP]

A strong “high exchange rate camp” remains influential in Korea. Its argument is simple: A weak won supports exports, which can prevent a wider economic collapse. The logic is not entirely wrong, especially when growth is weak. But hidden beneath it is the cost borne by ordinary citizens. Korea imports most of its food, oil and raw materials. When the won plunges, prices rise across the board. Bread, housing and public utilities become more expensive. With incomes stagnant, people become poorer. Consumption slows and the economy loses momentum. That is a crisis in itself.

The recent jump in the exchange rate stems from rising demand for dollars. Four factors are often cited. First, the interest rate gap with the United States. The U.S.'s benchmark rate stands at 3.75 to 4 percent, compared to Korea’s 2.5 percent. Second, liquidity has surged. Korea’s broad money supply (M2) reached a record 4.43 quadrillion won ($3.03 trillion) in September, up 8.5 percent from a year earlier. Third, investment in overseas equities has jumped. As of Nov. 25, Korean retail investors’ net purchases of foreign stocks reached $29.7 billion, nearly three times last year’s figure. Fourth, concerns have grown that the recent tariff agreement with the United States will require as much as $20 billion in annual investment over the next decade, tightening dollar supply.

These explanations make sense but fail to capture the full picture. The Korea–U. S. interest rate gap has been as large as two percentage points since 2023 without triggering similar turmoil. Liquidity has been rising steadily, not suddenly. Koreans have been shifting funds abroad for years, so why did the surge become so sharp this year? The government insisted that it could secure the required dollars without market disruption through returns on foreign reserves.

A deeper factor is expectations. In inflation management, the hardest task is controlling inflation expectations. If people expect prices to rise, they act in ways that cause inflation to rise further. The same logic applies to exchange rates. A widespread belief has taken hold that dollar demand will increase and the won will weaken further. That belief is rooted in anxiety about Korea’s economic trajectory.

The business environment has deteriorated. Korean companies are already being squeezed by Chinese competitors, and a series of pro-labor regulatory measures under the current administration has heightened uncertainty. As competitiveness erodes, growth prospects dim. Younger generations, facing soaring real estate prices and limited job opportunities, are shifting their money overseas. Expansionary fiscal policies raise additional concerns about long-term stability.

With the won-dollar exchange rate surging, imported food prices are also rising. A shopper inspects U.S. beef at a large supermarket in Seoul on Nov. 27. According to data released on Nov. 19, the price of chilled U.S. short rib reached 4,846 won per 100 grams, up 9.7 percent from the previous month and 22.4 percent higher than the seasonal average. [YONHAP]

The larger problem is politics. One year after the Dec. 3 martial law incident, politics remains consumed by disputes over “martial law” and “rebellion,” rather than economic priorities. Such dysfunction feeds pessimism about Korea’s future. Capital responds accordingly. The result has been a sharp rise in capital outflow by Korean nationals and a weakening won. One global consulting firm estimates that Korea will see a net outflow of 2,400 millionaires this year, with roughly $15.2 billion in accompanying assets moving overseas.

The government’s currency strategy is also misdirected. Pressuring exporters to supply dollars or tapping the National Pension Service, the public’s retirement safety net, cannot solve the problem. During the 1997 crisis, foreign investors fled. Today, it is Korean capital that is leaving. The essence of the exchange rate surge is not a shortage of dollars but a shortage of confidence.

A credible response must begin there. Korea needs policies that restore optimism, strengthen competitiveness and convince citizens and investors that the economy’s long-term path remains sound. Without rebuilding confidence in the fundamentals, any attempt to stabilize the exchange rate will be temporary at best.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.