Martial law fallout to add to uncertainty in FX market

The real-time index on the won-dollar exchange rate is displayed on an electronic board in a dealing room of Hana Bank in Seoul, Wednesday. Yonhap

The won-dollar exchange rate is anticipated to continue destabilizing in the aftermath of the short-lived martial law declared by President Yoon Suk Yeok on Tuesday night, as political chaos heightens uncertainties in the currency market, according to analysts Wednesday.

Martial law lasted only a few hours, as the opposition-led National Assembly blocked it with a parliamentary vote early Wednesday.

Nevertheless, experts said the incident can leave further negative impressions on Seoul's financial markets that are already undervalued due to Pyongyang’s military threats.

The experts also said the market has already been grappling with economic risks both domestically and internationally, such as a decline in the GDP rate and a second Donald Trump presidency in the U.S.

“The course of domestic politics can certainly affect the currency rate adversely,” an economist at a private think tank said on condition of anonymity, noting the possibility of Yoon’s impeachment is being addressed in political and legal circles.

“Such political risks can deal a blow to the markets, prompting investors to pull money out of Korea and weaken the value of the Korean won against the U.S. dollar.”

Hana Bank researcher Seo Jung-hoon voiced a similar view, noting the currency exchange rate rose as high as 1,441 won per dollar during the nighttime offshore trading after Yoon’s declaration of martial law.

It was the lowest level since Oct. 25, 2022, when the local currency sank to 1,444.2 won during intraday trading.

While the won finished at 1,410.1 won against the dollar in onshore trading, Wednesday, Seo viewed that it may surge again.

“The currency exchange rate breached the psychological threshold of 1,400 won even before martial law was announced, and it would not be surprising to see the rate go up further,” he said.

Hanyang University economics professor Ha Joon-kyung viewed the high currency rate may drive up import prices and weaken domestic demand while pushing up the cost of goods.

“Considering domestic demand is a key driver of GDP growth, the government needs to make sure the currency rate does not hurt the cycle of production and consumption, but unfortunately, the situation may exacerbate,” Ha said.

High production costs can push up the prices of goods for export, another growth engine that faces a bleak outlook as Trump wants to impose a blanket tariff of up to 20 percent on all goods brought into the U.S.

The professor also said the unstable currency market will result in a decline of foreign reserves.

“Foreign reserves serve as a financial cushion to ensure economic stability, and shrinking foreign reserves is worrisome,” he said.

Ha referred to the country’s foreign reserves already declining by $300 million to $415.39 billion in November from a month earlier.