[Photo: Professor Kim Sang-bong, Department of Economics, Hansung University]
The won-dollar exchange rate remains at a high level, influenced by various factors including income, prices, and nominal exchange rates between the two countries. The exchange rate can be interpreted differently depending on the timeframe considered, whether short-term or long-term.
In 2008, the government maintained a high exchange rate policy to mitigate trade deficits caused by a strong won. At that time, the government argued that exchange rate policy should be managed by the state. However, following the U.S. subprime mortgage crisis, the exchange rate surged to 1,597 won on March 6, 2009.
The high exchange rate policy led to significant side effects, including a rapid increase in import prices and a decrease in foreign reserves due to inconsistent exchange rate policies, benefiting only a few large exporting companies. Consequently, the direction of exchange rate policy changed.
After 2009, during the European debt crisis, funds flowed into South Korea, which had relatively strong economic fundamentals, leading to a decline in the exchange rate.
This trend reversed with the onset of the COVID-19 pandemic, the Russia-Ukraine war, and global tightening. Approximately 13 years later, in May 2022, the exchange rate surpassed 1,300 won again. Rising prices due to the pandemic and the war prompted the U.S. Federal Reserve to increase interest rates. In contrast, South Korea was unable to raise its base interest rate sufficiently, resulting in a reversal of the interest rate differential between South Korea and the U.S. By late 2022, the interest rates had inverted, with the U.S. rate at 5.5% and South Korea's at 3.5%, maintaining a 2.0 percentage point gap until late 2024.
Even after surpassing 1,300 won, the exchange rate continued to rise, crossing 1,400 won on September 22, 2022. This marked the first time the exchange rate reached the 1,400 won level since the global financial crisis in March 2009. Thus, the increase in the exchange rate since 2022 can be viewed as a result of long-term structural changes rather than a temporary phenomenon.
If we consider the exchange rate at around 1,350 won and reflect the increase in broad money (new M2) from 2023 to 2025, the won's exchange rate has risen by about 11%. Based on this, the current long-term equilibrium exchange rate is estimated to be around 1,480 won. Taking into account the impact of this year's supplementary budget, the long-term exchange rate could be viewed at around 1,490 won.
From November 2022, the exchange rate began to decline, reaching 1,220 won by the end of January 2023. However, it started to rise again from February 2024. Due to domestic economic stagnation and a strong dollar, the exchange rate continued to rise from the 1,300 won level. While the exchange rate remained below 1,400 won for most of 2024, it increased by over 30 won following Donald Trump's election as U.S. President and rose an additional 30 won after the announcement of martial law in December, reaching its highest level since 2008 at 1,480 won. However, these political events are better interpreted as factors causing short-term overshooting rather than changing the direction of the exchange rate.
By early April 2025, the exchange rate stabilized in the high 1,400 won range but fell after the impeachment ruling on April 4. Following the inauguration of the current government in June 2025, the exchange rate continued to decline, reaching 1,350 won by the end of June. However, it began to rise again in July, reaching the 1,470 won range by December. On December 24, the exchange rate surpassed 1,480 won but fell back to the 1,440 won range due to verbal interventions from the government. The exchange rate fluctuated around 1,430 won but ultimately closed 2025 at 1,443 won.
Entering 2026, the exchange rate rose to the high 1,400 won range, showing a downward trend when government verbal interventions occurred. However, following the outbreak of war between the U.S. and Iran, the exchange rate surpassed 1,500 won in March and fluctuated between 1,400 and 1,500 won, crossing 1,540 won again in June.
The recent surge in the exchange rate is largely attributed to significant foreign net selling of stocks. By the end of May, South Korea experienced foreign net selling of $62.43 billion, the largest among Asian countries, while most other countries also saw profit-taking or portfolio adjustments. Given that domestic stock prices increased by 75.6% in 2025 and are projected to exceed 100% in 2026, it is reasonable for foreign investors to realize profits at this time.
Therefore, the current exchange rate in the 1,530 won range cannot be explained solely by economic fundamentals. If the government continues its verbal interventions and efforts to stabilize the exchange rate while normalizing supply and demand in the foreign exchange market, the exchange rate is likely to converge around 1,480 to 1,490 won.
In 2008, the government maintained a high exchange rate policy to mitigate trade deficits caused by a strong won. At that time, the government argued that exchange rate policy should be managed by the state. However, following the U.S. subprime mortgage crisis, the exchange rate surged to 1,597 won on March 6, 2009.
The high exchange rate policy led to significant side effects, including a rapid increase in import prices and a decrease in foreign reserves due to inconsistent exchange rate policies, benefiting only a few large exporting companies. Consequently, the direction of exchange rate policy changed.
After 2009, during the European debt crisis, funds flowed into South Korea, which had relatively strong economic fundamentals, leading to a decline in the exchange rate.
This trend reversed with the onset of the COVID-19 pandemic, the Russia-Ukraine war, and global tightening. Approximately 13 years later, in May 2022, the exchange rate surpassed 1,300 won again. Rising prices due to the pandemic and the war prompted the U.S. Federal Reserve to increase interest rates. In contrast, South Korea was unable to raise its base interest rate sufficiently, resulting in a reversal of the interest rate differential between South Korea and the U.S. By late 2022, the interest rates had inverted, with the U.S. rate at 5.5% and South Korea's at 3.5%, maintaining a 2.0 percentage point gap until late 2024.
Even after surpassing 1,300 won, the exchange rate continued to rise, crossing 1,400 won on September 22, 2022. This marked the first time the exchange rate reached the 1,400 won level since the global financial crisis in March 2009. Thus, the increase in the exchange rate since 2022 can be viewed as a result of long-term structural changes rather than a temporary phenomenon.
If we consider the exchange rate at around 1,350 won and reflect the increase in broad money (new M2) from 2023 to 2025, the won's exchange rate has risen by about 11%. Based on this, the current long-term equilibrium exchange rate is estimated to be around 1,480 won. Taking into account the impact of this year's supplementary budget, the long-term exchange rate could be viewed at around 1,490 won.
From November 2022, the exchange rate began to decline, reaching 1,220 won by the end of January 2023. However, it started to rise again from February 2024. Due to domestic economic stagnation and a strong dollar, the exchange rate continued to rise from the 1,300 won level. While the exchange rate remained below 1,400 won for most of 2024, it increased by over 30 won following Donald Trump's election as U.S. President and rose an additional 30 won after the announcement of martial law in December, reaching its highest level since 2008 at 1,480 won. However, these political events are better interpreted as factors causing short-term overshooting rather than changing the direction of the exchange rate.
By early April 2025, the exchange rate stabilized in the high 1,400 won range but fell after the impeachment ruling on April 4. Following the inauguration of the current government in June 2025, the exchange rate continued to decline, reaching 1,350 won by the end of June. However, it began to rise again in July, reaching the 1,470 won range by December. On December 24, the exchange rate surpassed 1,480 won but fell back to the 1,440 won range due to verbal interventions from the government. The exchange rate fluctuated around 1,430 won but ultimately closed 2025 at 1,443 won.
Entering 2026, the exchange rate rose to the high 1,400 won range, showing a downward trend when government verbal interventions occurred. However, following the outbreak of war between the U.S. and Iran, the exchange rate surpassed 1,500 won in March and fluctuated between 1,400 and 1,500 won, crossing 1,540 won again in June.
The recent surge in the exchange rate is largely attributed to significant foreign net selling of stocks. By the end of May, South Korea experienced foreign net selling of $62.43 billion, the largest among Asian countries, while most other countries also saw profit-taking or portfolio adjustments. Given that domestic stock prices increased by 75.6% in 2025 and are projected to exceed 100% in 2026, it is reasonable for foreign investors to realize profits at this time.
Therefore, the current exchange rate in the 1,530 won range cannot be explained solely by economic fundamentals. If the government continues its verbal interventions and efforts to stabilize the exchange rate while normalizing supply and demand in the foreign exchange market, the exchange rate is likely to converge around 1,480 to 1,490 won.
* This article has been translated by AI.
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