Why Korean won is still above 1,500 despite easing Middle East tensions

A stock ticker at Hana Bank headquarters in Seoul shows the Korean won trading at 1,506 won against the U.S. dollar during intraday trading, Wednesday. Yonhap

Even as Korea remained one of Asia’s top performers with its benchmark KOSPI smashing through the 8,000-point mark and a record current account surplus, the Korean won has remained stubbornly weak against the U.S. dollar — an unusual divergence that is puzzling investors and policymakers alike.

Ordinarily, strong exports, rising stock prices and robust external balances would support a stronger currency. Instead, the won has struggled. This year alone, the won-dollar exchange rate closed above the psychologically important 1,500-won threshold on 19 trading days, surpassing levels seen during the global financial crisis.

The won finished onshore trading at 1,501.2 won per U.S. dollar in Seoul trading on Wednesday, 3.1 won stronger than the previous session.

The won’s underlying value has weakened as well. According to the Bank for International Settlements, Korea’s real effective exchange rate index — a widely used measure of a currency’s global purchasing power — fell to 85.06 in April, the lowest level since March 2009.

The government has largely portrayed the weak won as a temporary market phenomenon, attributing it to foreign investors taking profits after the sharp rally in Korean equities. As overseas investors sell local stocks and convert proceeds back into dollars for portfolio rebalancing, demand for the U.S. currency rises.

“As foreign investors rebalance their portfolios and exchange won into dollars, dollar demand has temporarily increased, pushing up the exchange rate,” Finance Minister Koo Yun-cheol said during a Cabinet meeting Tuesday.

Geopolitical tensions in the Middle East have added to the pressure. Because Korea relies heavily on imported energy, the won is particularly vulnerable during periods of oil market instability.

But economists say those short-term factors alone cannot explain why the won’s weakness has become so persistent even amid booming exports and strong market performance. More fundamentally, they argue, the balance of money flowing in and out of Korea has shifted.

Overseas investment by Korean retail and institutional investors has surged in recent years, steadily increasing structural demand for dollars. At the same time, the money earned through exports is no longer flowing back into the domestic market as consistently as it once did, as exporters increasingly hold onto dollars or reduce currency hedging in anticipation of a persistently weak won, according to Kang Sung-jin, an economics professor at Korea University.

Prof. Yang Jun-sok of the Catholic University of Korea noted that Korea’s relatively small foreign exchange market tends to magnify the impact of such capital-flow shifts.

“In larger economies, changes in exporters’ dollar holdings or foreign investors’ stock trading may not significantly move the currency market. But Korea’s foreign exchange market is relatively small for the size of its economy, so those shifts can have an outsized impact on the won,” he said.

The shift is evident in numbers. The country posted a record current account surplus of $85 billion in the first quarter, yet nearly as much money flowed back out through overseas investment. Net assets in the financial account, which includes foreign direct and portfolio investment, reached $65.4 billion.

“Put simply, the forces pushing dollars out of Korea are currently stronger than the forces bringing them in,” Kang said. “Korean companies are expanding overseas investment, while exporters are increasingly reluctant to convert their dollar earnings back into won because they expect the currency to remain weak.”

The professor added that foreign investors have also shown less appetite for Korean bonds, limiting one of the traditional sources of dollar inflows that could otherwise offset equity-related outflows.

“Foreign funds have continued to flow out of the stock market, and bond inflows are no longer strong enough to offset that pressure,” Kang said. “Unless Korea improves its broader investment climate and growth outlook, there will be limited reasons for global capital to flow back into the country.”

Yang also warned that the country’s current export strength remains heavily concentrated in semiconductors, leaving the economy vulnerable if the AI-driven chip boom cools. “Korea is currently running a current account surplus, but if the AI rally fades, the trade balance could deteriorate very quickly.”