Why Is the Korean Won So Weak? The Main Causes

The Korean Won has experienced significant weakness, impacting South Korea’s economy. Understanding the factors contributing to this currency trend is important for observing global financial dynamics.

International Economic Influences

The strength of the US dollar plays a substantial role in the Korean Won’s depreciation. The Federal Reserve’s interest rate decisions directly influence the dollar’s value. When the Fed raises interest rates, dollar-denominated assets become more attractive to investors. This can lead to capital flowing out of other currencies and into the dollar, putting downward pressure on currencies like the Won.

Global inflation, particularly in energy and commodity prices, strains import-dependent economies like South Korea. South Korea relies heavily on imports for nearly 98% of its fossil fuel consumption. Elevated prices for crude oil, gas, and coal result in higher import bills. This increased cost requires South Korea to spend more foreign currency, increasing the supply of Won in the foreign exchange market and contributing to its weakening.

A slowdown in global economic activity or rising recession fears reduces demand for Korean exports. South Korea is a major exporting nation, with its trade influenced by global demand for products like semiconductors. When global trade contracts, demand for these exports decreases, reducing the inflow of foreign currency into South Korea. This decline in foreign currency earnings can weaken the Won, as there is less demand for the currency from international buyers.

Domestic Economic Conditions

Rising inflation within South Korea can erode the Won’s purchasing power. While headline inflation has shown signs of moderating, core inflation, which excludes volatile food and energy prices, has decreased more gradually. Sustained domestic inflationary pressures can diminish the Won’s real value, making it less attractive to hold compared to currencies with more stable prices.

South Korea’s economic growth outlook influences investor confidence and the Won’s value. A less optimistic growth forecast can deter foreign investment, as investors seek higher returns in economies with stronger prospects. For example, the Bank of Korea lowered its 2025 growth outlook to 0.8% from 1.5% due to uncertainties like US tariff policy and weak domestic demand. Such revisions can lead to capital outflows, as foreign investors withdraw funds in search of more favorable investment environments.

High levels of household debt in South Korea can constrain consumer spending and economic activity. South Korea’s household debt-to-GDP ratio stood at 91.7% in the fourth quarter of 2024, ranking as the second highest among major nations. While this ratio has seen some downward adjustment, its elevated level can impact investor confidence. This situation can limit monetary policy effectiveness and contribute to a less favorable economic environment, influencing the Won’s stability.

Trade and Capital Account Developments

A widening trade deficit directly impacts the Won’s value by increasing demand for foreign currency. When a country imports more goods and services than it exports, it must pay for these imports in foreign currency. For example, South Korea recorded a trade deficit of $5.97 billion in early 2022, a significant shift from a surplus. This imbalance creates a greater supply of the Won relative to foreign currency, leading to depreciation.

Capital outflows occur when investors move funds out of a country’s financial markets. Foreign investors have sold off South Korean stocks and bonds, leading to significant outflows, such as $4.2 billion in December 2024. This trend creates demand for foreign currency and increases the supply of Won, putting downward pressure on its value. Domestic investors increasing their overseas investments also contribute to this outflow, further exacerbating the Won’s weakness.

Foreign exchange reserves serve as a buffer against external shocks and provide liquidity for a country’s external obligations. While South Korea’s foreign exchange reserves increased to $411.3 billion in July 2025, they have shown mixed movements. A significant decline in these reserves can signal economic vulnerabilities or a reduced capacity to intervene in the foreign exchange market, which could further weaken market confidence in the Won. The Bank of Korea holds these reserves to maintain intervention capacity and cope with shocks.

Central Bank Policy

An interest rate differential between the Bank of Korea and other major central banks, particularly the US Federal Reserve, can encourage capital outflow and weaken the Won. For example, in November 2024, the US Federal Reserve’s interest rate range was 4.24%-4.5%, while South Korea’s rate was 3.00%. A wider gap incentivizes investors to move capital to earn better returns, reducing demand for the Won and contributing to its depreciation.

The Bank of Korea’s monetary policy stance impacts market perceptions of the Won’s stability. The Bank of Korea plans to lower its base rate further in 2025, acknowledging increased political uncertainties and downside risks to the economy. This accommodative stance, while aimed at supporting growth and stabilizing inflation, can signal a willingness to prioritize domestic economic conditions over immediate currency strength, potentially leading to further depreciation.

The Bank of Korea may intervene in the foreign exchange market to stabilize the Won, typically by selling foreign currency to buy Won. In the second quarter of 2024, South Korea’s foreign exchange authorities sold a net $5.80 billion for market intervention. While such interventions can temporarily reduce exchange rate volatility and calm market sentiment, their effectiveness can be limited, especially against strong economic forces. Details of these interventions are often not disclosed to avoid influencing market expectations.