The won-dollar exchange rate, which had surpassed the 1,550-won-per-dollar mark, fell sharply over a period of just over one month, dropping to the early 1,400-won range. Given the strong concerns that prolonged high exchange rates could have adverse effects on the national economy, the recent stabilization and downward trend in the exchange rate appear positive.
Textbook analysis indicates that the impact of a rising won-dollar exchange rate on the national economy is twofold. A rise in the exchange rate, meaning a weaker won, lowers the price of products priced in won and enhances export price competitiveness compared to other countries. Conversely, for Korea, which must import foreign products—especially energy—a rise in the exchange rate increases the price of dollar-denominated goods, thereby amplifying upward pressure on domestic inflation. In particular, with oil prices soaring due to the Iran situation, a rising exchange rate further exacerbates the burden of inflation caused by high oil prices. In other words, while it is positive for exports, it triggers adverse effects such as rising prices for imports. The problem lies in the fact that the domestic economy relies heavily on export growth in specific industries. Prolonged high exchange rates can lead to imbalances and polarization between export-led growth and domestic demand growth.
Foreign exchange authorities, including the Bank of Korea, have consistently emphasized that the won-dollar exchange rate exceeding 1,500 won due to the Iran situation deviated significantly from the fundamentals of the domestic economy, and have continued efforts to curb the rise in the exchange rate. A representative example is the shift in stance by the Bank of Korea, which has strongly signaled a tightening policy focused on curbing inflation. Prior to the base rate hike in July, the Bank of Korea's base rate stood at 2.5%, approximately one percentage point lower than the U.S. base rate of 3.5% to 3.7%. Considering the tendency for capital to flow toward higher interest rates, the prolonged period during which U.S. interest rates were higher than those in Korea increased upward pressure on the exchange rate, contributing to the steady rise in the won-dollar exchange rate since the second half of 2022, when interest rates between Korea and the United States reversed. In response, Bank of Korea Governor Shin Hyun-song has shifted focus toward stabilizing the exchange rate through moderate interest rate hikes, taking into account the current export growth trend rather than maintaining low interest rates. Consequently, the exchange rate has stabilized rapidly due to such intentions by the Bank of Korea and the impact of dollar conversion funds inflowed following SK Hynix's ADR issuance.
However, as previously mentioned, a decline in the exchange rate could negatively affect Korea's export growth, so there are indeed concerns about the rapid short-term drop in the exchange rate. Nevertheless, a fall in the exchange rate does not necessarily undermine domestic export growth. Even if the won appreciates against the dollar and the won-dollar exchange rate falls, if currencies of countries competing with Korean companies in exports—such as the yen, yuan, or euro—also show similar strength against the dollar, the adverse effects of a falling won-dollar exchange rate on exports may be limited. This is akin to the logic that if countries competing with Korea in exports face tariffs of around 15%, and they themselves are subject to similar tariff levels, the shock would be somewhat diluted.
Concerns about rising exchange rates seem to have shifted too quickly into worries about a sharp decline within just over a month. However, rather than interpreting the adverse effects solely based on the fall in the won-dollar exchange rate, it is necessary to also consider changes in the value of other countries' currencies.
in OPINION
