The South Korean won is the official currency of South Korea, issued by the Bank of Korea. After Korea was divided in 1945, the won replaced the Korean yen at par. Initially pegged at 15 won to 1 US dollar, several devaluations occurred since its introduction. After being replaced by another currency (the hwan in 1953), the won in its current form was reintroduced in 1962. Following an agreement with the International Monetary Fund in 1997, the won became a freely floating currency, allowing it to fluctuate based on the market – consequently this opened up the won to potential volatility, being a reflection of overall South Korean economic conditions and global financial events. Today, the won is experiencing significant volatility from a combination of economic and political factors. Through analysis of the currency’s features and trends, we can make predictions for its future outlook, and gain further insight into the dynamics of the South Korean economy.
What are the main factors driving the value of the South Korean won?
Several key factors contribute to the value of the South Korean won. For example, Korea’s overall trade surpluses and deficits have major impacts on currency value. Changes in global trade dynamics, particularly those with China and the US, have significant effects. As previously mentioned, political stability (or lack of it) can cause great volatility in the won’s value. Korea is also vulnerable to changes in US monetary policy, as its foreign exchange market is traded on a dollar basis. Arguably, US monetary policy is more influential on the won than Korea’s own in determining exchange rates. Other factors affecting the won outside of Korea’s borders include global risk perception – Korea’s instability being broadcast across the globe, combined with poor stock market performance can only have detrimental effects on investor confidence. Long term factors are also at play, like internal price factors such as the relative price of nontradable goods. Between 1985-2023, this has been the main consistent driver of the won’s depreciation.
How has recent political turmoil affected the South Korean economy and currency?
In December 2024, President Yoon Suk Yeol made a failed attempt to impose martial law – the first time in 40 years. The following impeachment and significant political turmoil has significantly affected the country’s economy in a number of ways:
Currency Depreciation
Following these events, the South Korean won weakened considerably, hitting a 15-year low of 1,487 against the US dollar. With South Korea being an import-dependent economy, these sharp declines in interest rates increase the cost of raw materials and foreign debt.
Stock Market Performance
In 2024, The Korea Composite Stock Price Index (KOSPI) experienced major fluctuations, and became among one of the worst-performing markets globally. Downstream from political uncertainty, the market still appears jittery, despite recent recoveries. Investor confidence has been damaged greatly by the ongoing political situation, with foreign investors selling more than 17 trillion won in Korea treasury bonds – a grave reflection of confidence loss in the nation’s overall financial stability.
Economic Growth
Growth forecasts from The Bank of Korea have been lowered from 2.1% to 1.9% for 2025, and just 1.8% being projected for 2026. In the fourth quarter of 2024, the economy barely grew at all, just 0.1% from the previous quarter.
Credit Rating Concerns
Certain analysts worry that with continued political instability, this could have negative impacts on South Korea’s overall credit rating, with potential for higher borrowing costs for the government, enterprises owned by the state and corporations.
What measures are the Bank of Korea taking to stabilise the won?
In attempts to address these issues, the Bank of Korea (BOK) has implemented several measures in response to political turmoil and economic challenges:
Liquidity Injection
Short term liquidity is being injected into markets by the BOK, through irregular repurchase (RP) transactions. In addition to this, the range of eligible securities for liquidity injection has also expanded, allowing RP transactions to benefit a wider variety.
Market Stabilisation
The central bank is making outright purchases of treasury bonds, with repurchase operations for monetary stabilisation bonds being implemented as needed. In the foreign exchange market, RP transactions are also helping to mitigate rapid fluctuations in exchange rates. In addition to this, emergency buybacks of government bonds will be implemented if needed.
Interest Rates
The BOK is remaining open to interest rate adjustments, shown by recent large increases (50 basis points) in policy rates in order to balance financial stability and price stability.
Other Strategies
Working in conjunction with the government, the BOK is using all available policy instruments to respond to and prevent escalations in volatility across financial and foreign exchange markets. Monitoring has been increased overal, with the financial and foreign exchange markets being subject to 24/7 attention from an Economic and Monitoring Task Force. International credit rating agencies are also being actively communicated with, alongside financial institutions to maintain global confidence in Korea’s creditworthiness.
What is the future outlook for the South Korean won?
If currency conditions are anything to go by, the future of the South Korean won looks to be plagued by further uncertainty and volatility. With official economic growth projections being lowered more than previous estimates from the IMF and OECD, the slower growth outlook will put major pressure on the won. Obvious internal political instability aside, new external factors like the implementation of US trade restrictions under the Trump administration can have significant effects on the won’s value. Despite all the negative press, there is still hope for stability ahead. Some analysts, like UBS, have suggested that the won might be poised for recovery in 2025, due to positive developments like the National Pension Service’s foreign exchange hedging activities and an overall slowdown in outbound investments. Furthermore, South Korea’s inflation rate rose to 2.2% in January 2025, supporting the BOK’s decision to maintain interest rates at 3%. This may be indicative of stability to come.
Conclusion
The South Korean won remains highly sensitive to both internal and external economic and political factors. The turmoil of current events has put significant pressure on the currency, being marred by depreciation, market volatility and a decline in investor confidence. However, proactive measurements from the Bank of Korea have demonstrated their commitment to mitigating further volatility. While the short term forecasts look grim with continued uncertainty, potential signs of recovery are beginning to be seen. Moving forward, the trajectory of the won will depend on how effectively South Korea can negotiate its domestic challenges as well as the evolving state of economics globally.
As always, for currency news and insight into the world of currency, make sure to stay up to date with our Expert Analysis, as well as our daily Market Commentary.
Caleb Hinton
Caleb is a writer specialising in financial copy. He has a background in copywriting, banking, digital wallets, and SEO – and enjoys writing in his spare time too, as well as language learning, chess and investing.
