The South Korean won sharply declined against the U.S. dollar on April 16, with the won-dollar exchange rate surpassing the 1400 won mark for the first time in 17 months. This level has been breached only three times before. Top finance officials from Korea and Japan reinforced a sense of urgency by conducting their first-ever joint verbal intervention to curb market volatility.
Foreign exchange authorities have stressed that the won’s weakness is not an isolated event but part of a broader phenomenon affecting non-dollar currencies. But the Korean won’s depreciation has been significantly more pronounced, even among the so-called “weaker” Asian currencies, making it one of the worst-performing currencies this year.
The won’s value dropped 3.42% against the dollar in the first 16 days of this month, marking the steepest decline among 41 currencies, according to Bank of Korea’s Economic Statistics System (ECOS) on April 19. The Japanese yen fell 1.86% against the dollar during the same period. Compared to other Asian currencies like the Thai baht (-0.99%), the Philippine peso (-1.15%), and the Vietnamese dong (-1.54%), the won’s depreciation was notably severe.
Year-to-date figures paint a similarly grim picture, with the won down 7.1% against the greenback since January, making it the third most depreciated currency among 16 major currencies, after the Turkish lira (-8.9%) and the Japanese yen (-8.6%). The Chinese yuan, considered a proxy currency for the won, fell 2% during the same period.
The won-dollar exchange rate briefly crossed the 1400 won mark during trading hours earlier this week, a rare event that has only happened three times before: during the 1997 Asian financial crisis, the 2008 global financial crisis, and the domestic credit crisis in 2022, known as the Legoland crisis.
The won’s weakness is attributed to the strength of the dollar and the geopolitical tensions in the Middle East. Financial markets have scaled back expectations about Federal Reserve rate cuts after Fed officials implied they intended to keep interest rates higher for longer. This boosted the dollar and put downward pressure on non-dollar currencies, especially the won. The dollar index, which tracks the greenback against a basket of six major currencies, rallied to over 106, nearing its previous high of 107.
Asian currencies have been further hit by rising geopolitical tensions in the Middle East, exacerbated by the conflict between Iran and Israel, which has pushed up international oil prices. Asian currencies weakening in response to a surge in oil prices has become a common problem for Asian countries. Experts say the relationship between the dollar and oil prices has become increasingly synchronized, with the resurgent dollar often matching rising oil prices.
Korea’s dependence on oil imports may add further pressure to the won. Higher oil prices will likely worsen the country’s trade balance, decreasing the amount of dollars flowing into Korea. The relative scarcity of the dollar could further weaken the won.
Analysts suggest that several other factors could contribute to the won’s depreciation. These include unresolved real estate project financing (PF) defaults, the potential economic downturn triggered by inflation and decreased spending, and uncertainties surrounding government policy following the April general election.
“The depreciation of the Japanese yen and Chinese yuan is partly due to policies aimed at stimulating the economy through currency devaluation,” said Park Sang-hyun, a research fellow at HI Investment & Securities. “The case of the Korean won is different from the two currencies as the won is somewhat marginalized from the global supply chain expansion and faces various internal structural risks.”
