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Won flirts with crisis-era levels, adding to inflation strain amid escalating Middle East conflict

Published: 18 Mar. 2026, 19:03

JIN MIN-JI
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Foreign exchange rates are displayed on an electronic board at Incheon International Airport Terminal 1 on March 18. [NEWS1]

The escalating Middle East conflict is driving the dollar-won exchange rate toward historic levels, breaching the key 1,500 threshold three times over the past two weeks, giving rise to concerns about a new norm as long as the turmoil persists.

While the currency stabilized in the 1,480 won range on Wednesday, upside pressure persists as oil prices remain elevated. Some economists project the won to reach as high as 1,550 won if the war persists, but largely expect the currency to stabilize in the mid-1,450 won range once the oil price stabilizes.

A weak won could add inflationary pressure to an economy already strained by high oil prices, potentially dampening domestic demand and weighing on overall growth.

After the won touched 1,500 during overnight trading on March 3 and again on Friday, the level was broken during intratrading on Monday — the first breach during regular trading hours since March 2009, amid the global financial crisis.

The initial sharp depreciation this month prompted financial authorities to scramble to stabilize the currency, with Bank of Korea Gov. Rhee Chang-yong postponing a trip overseas for an International Monetary Fund and Bank for International Settlements events to attend an emergency meeting on March 4 as the central bank vowed to work with the government to rein in excessive currency market volatility.

The rate steadied at 1,483.1 won at 3:30 p.m. on Wednesday, climbing 10.5 won from the previous session. But concerns remain as Dubai crude oil remained at $158 per barrel on Tuesday, up from $71 in late February, according to data from NH Investment & Securities.

The won’s depreciation has been much sharper than the weakening of currencies of similarly energy-dependent economies, prompting the financial authorities to signal verbal intervention to curb the slide. While the won has depreciated by more than 3 percent since the outbreak of the Iran war on Feb. 28, the yen weakened by around 1.8 percent over the same period despite Japan's reliance on energy imports.

A weaker won against the dollar could raise the cost of crude oil imports — about 70 percent of which Korea sources from the Middle East — potentially narrowing Seoul's current account surplus and fueling inflation, in turn heightening the risk of stagflation amid weak domestic demand.

“The won is facing an emergency situation due to risks in the Middle East,” said Park Sang-hyun, an analyst at iM Securities. “If uncertainty over the Iran crisis continues and oil prices remain high, the dollar–won rate is likely to settle around the 1,500 level,” he added, forecasting the currency to trade between 1,480 and 1,520 won this week.

“Concerns over persistently high oil prices are already reflected in the market. Unlike Japan, Korea does not have a reserve currency, which limits its defensive capacity,” Park said. “At the same time, foreign investors are pulling funds from the stock markets amid rising oil prices, further widening the won’s weakness.”

“If Middle East tensions worsen or persist, the dollar–won rate could temporarily rise to a range of 1,500 to 1,550,” said Kim Jin-seong, an analyst at Heungkuk Securities, in a recent report. “Korea’s high energy consumption and import dependence — especially its heavy reliance on Middle Eastern crude oil — mean that the Iran war inevitably poses a significant threat to both inflation and economic growth.”

Korea’s economic growth could contract by 0.3 percentage points if the war lasts longer than three months, according to a recent report by NongHyup Financial Group’s research center, adding that growth could fall to near-zero if the conflict drags on for a year. The warning comes as tensions escalate following Iran’s confirmation Tuesday of the death of security chief Ali Larijani. A senior Iranian official also said the country’s new supreme leader has rejected de-escalation proposals conveyed through intermediaries, Reuters reported.

Electronic display boards at Hana Bank's trading room in central Seoul show Korea's financial markets on March 18. [NEWS1]

But once tensions in the Middle East ease, the won is expected to hold steadily within the 1,400 range.

“Assuming a gradual stabilization of the Middle East situation, domestic long-term interest rates are expected to follow a moderately upward but sticky trend, while the dollar–won rate is likely to return gradually to a stable downward trajectory, averaging around 1,450 for the year and reaching approximately 1,420 by the end of the year,” Kim added.

Park also shared a similar outlook. “If Middle East risks ease and oil prices fall, we expect the dollar-won rate to potentially move back below 1,450 won,” he said, citing Korea’s solid trade surplus and its scheduled inclusion in the FTSE World Government Bond Index. The inclusion, which will be phased in over an eight-month period starting in April, is expected to support the won by encouraging capital inflow.

BY JIN MIN-JI [[email protected]]