Financial authorities need to step up policy measures to bolster value of Korean currency
The South Korean currency stayed around its lowest level in 15 years Friday, reflecting heightened worry among investors about the 2025 outlook for US interest rates and the continued political turmoil sparked by President Yoon Suk Yeol’s martial law order and subsequent impeachment.
The Korean won closed at 1,451.4 per dollar Friday, up 0.5 won from 1,451.9 the previous session -- the lowest level since March 2009.
The immediate cause for dragging down the Korean currency involved the US Fed, which lowered interest rates by a quarter of a percentage point on Wednesday. The rate cut itself was widely expected, but investors were surprised by its revised forecast that there would be only two rate cuts in 2025.
The Fed’s signal is based on the faster-than-expected growth of the US economy and related concerns about potential inflation risks. The US dollar on Wednesday rose to its highest level against the won since November 2022.
Even without the Fed’s revised rate cut outlook, the Korean currency has come under pressure in recent sessions as a result of the political upheaval initiated by Yoon’s short-lived martial law imposition on Dec. 3.
The impeachment motion against Yoon was passed at the National Assembly on Dec. 14. Due to the dramatic turn of the political situation, Korea is forced to face an extended leadership vacuum until the Constitutional Court makes a decision on the impeachment within six months.
The uncertainty and confusion over the absence of a president is feared to affect the Korean economy in a negatively way, at a critical time when it needs to deal with trade barriers linked to US President-elect Donald Trump’s protectionist policies.
That the Korean won hovered around 1,450 won against the greenback for two straight sessions is now generating speculation that it may lose its value further -- up to the much-dreaded 1,500 won level.
Experts regarded the 1,450 won level as the major supportive threshold, but it seems apparent that authorities need additional policy measures to defend that crucial level.
On Friday, Korea’s financial authorities announced they would loosen up foreign exchange regulations in a bid to help improve liquidity conditions in the currency market.
The move came after the Bank of Korea and the National Pension Service on Thursday agreed to raise the currency swap deal to $65 billion from the current $50 billion. The agreement will also be extended to the end of 2025.
Finance Minister Choi Sang-mok tried to reassure investors by saying that Korea’s economic fundamentals remain solid and there are multiple ways to grapple with the volatility on the market. Choi said various measures available will be used to stabilize the financial market as well as the foreign exchange rate.
The damage caused by the weak won could be far-reaching and substantial, experts warn. The aviation industry, for instance, has suffered losses exceeding 1 trillion won ($691 million) over the past three months, while the steel and petrochemical sectors are also facing an unavoidable decline in profitability.
The refining industry is forecast to shoulder an additional cost of 1.7 trillion won when the Korean currency weakens by 10 won against the dollar.
The problem does not end there. Higher import prices drive broader inflationary pressures, further hindering domestic demand recovery. Export-oriented firms, though unscathed in the short term, could face eroded competitiveness in the long run due to increased costs of raw material and equipment imports.
Authorities must come up with stronger and sustainable measures given that a prolonged depreciation of the Korean won could trigger a cascade of adverse effects, including a downgrade in Korea’s credit rating, higher corporate financing costs and a broader economic fallout.