[Photo by Yonhap]
The won’s real value fell last month to its lowest level since the global financial crisis, pressured by a Middle East war that pushed up both the exchange rate and energy prices.
According to the Bank for International Settlements on April 26, South Korea’s real effective exchange rate (REER) index stood at 85.44 (2020=100) at the end of March, down 1.57 points from a month earlier. It was the lowest reading in 17 years, since March 2009 (79.31).
The REER measures a currency’s external purchasing power, reflecting not only the nominal exchange rate but also price levels and the currencies of major trading partners. A reading above 100 indicates overvaluation versus the base year, while below 100 suggests undervaluation.
After staying above 100 from October 2020 through July the following year, the index hovered in the mid-90s amid a strong dollar and weaker Asian currencies. It slipped into the low 90s following the December 2024 martial law episode and then moved sideways. As the won-dollar rate jumped in October last year, the index fell into the 80s and has remained below 90 for six straight months through last month.
Among 64 economies tracked by the BIS, South Korea’s REER last month was the third-lowest, after Japan (66.33) and Norway (72.7). The Japanese yen also fell to its weakest level since Japan adopted a floating exchange rate system in 1973.
The latest decline was attributed to a combination of higher oil prices and a sharp rise in the exchange rate linked to the Middle East war. The won-dollar rate rose 6.3% last month based on weekly closing prices, briefly topping 1,500 won per dollar for the first time since the financial crisis.
A surge in energy prices also lifted import costs, eroding the won’s real purchasing power. The Bank of Korea said the import price index for March (in won terms, preliminary) rose 16.1% from the previous month to 169.38, from 145.88. It marked the steepest monthly increase since January 1998 (17.8%), 28 years and two months earlier.
With the United States and Iran entering a ceasefire, the exchange rate’s rise has eased somewhat this month. Still, the won has remained elevated around 1,470 to 1,480 per dollar amid ongoing geopolitical uncertainty and high oil prices.
Kim Yu-mi, a researcher at Kiwoom Securities, said recent trading has shown a clear pattern: when risks ease, the dollar weakens and the exchange rate falls, but when anxiety returns, upward pressure intensifies.
She added that the exchange rate’s direction will likely be determined by the relative investment appeal of domestic assets compared with those in the United States. If dollar weakness continues through the third quarter, she said, stronger preference for Korean assets could increase foreign inflows while slowing overseas investment by residents, adding downward pressure on the exchange rate.
According to the Bank for International Settlements on April 26, South Korea’s real effective exchange rate (REER) index stood at 85.44 (2020=100) at the end of March, down 1.57 points from a month earlier. It was the lowest reading in 17 years, since March 2009 (79.31).
The REER measures a currency’s external purchasing power, reflecting not only the nominal exchange rate but also price levels and the currencies of major trading partners. A reading above 100 indicates overvaluation versus the base year, while below 100 suggests undervaluation.
After staying above 100 from October 2020 through July the following year, the index hovered in the mid-90s amid a strong dollar and weaker Asian currencies. It slipped into the low 90s following the December 2024 martial law episode and then moved sideways. As the won-dollar rate jumped in October last year, the index fell into the 80s and has remained below 90 for six straight months through last month.
Among 64 economies tracked by the BIS, South Korea’s REER last month was the third-lowest, after Japan (66.33) and Norway (72.7). The Japanese yen also fell to its weakest level since Japan adopted a floating exchange rate system in 1973.
The latest decline was attributed to a combination of higher oil prices and a sharp rise in the exchange rate linked to the Middle East war. The won-dollar rate rose 6.3% last month based on weekly closing prices, briefly topping 1,500 won per dollar for the first time since the financial crisis.
A surge in energy prices also lifted import costs, eroding the won’s real purchasing power. The Bank of Korea said the import price index for March (in won terms, preliminary) rose 16.1% from the previous month to 169.38, from 145.88. It marked the steepest monthly increase since January 1998 (17.8%), 28 years and two months earlier.
With the United States and Iran entering a ceasefire, the exchange rate’s rise has eased somewhat this month. Still, the won has remained elevated around 1,470 to 1,480 per dollar amid ongoing geopolitical uncertainty and high oil prices.
Kim Yu-mi, a researcher at Kiwoom Securities, said recent trading has shown a clear pattern: when risks ease, the dollar weakens and the exchange rate falls, but when anxiety returns, upward pressure intensifies.
She added that the exchange rate’s direction will likely be determined by the relative investment appeal of domestic assets compared with those in the United States. If dollar weakness continues through the third quarter, she said, stronger preference for Korean assets could increase foreign inflows while slowing overseas investment by residents, adding downward pressure on the exchange rate.
* This article has been translated by AI.
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