The South Korean won has recently plunged to a historic low of 1,464.8 per U.S. dollar, marking the lowest exchange rate in over 15 years. This decline is primarily driven by the U.S. Federal Reserve's high interest rates, which have bolstered the U.S. dollar and prompted investors to withdraw from emerging markets. Political instability in South Korea has further exacerbated the situation, particularly following President Yoon Suk-yeol's failed martial law and subsequent impeachment proceedings against him and acting president Han Duck-soo. The won-dollar exchange rate surpassed 1,480 won for the first time on December 27, 2024, coinciding with the impeachment motion passed by the Democratic Party-led National Assembly. [193aba2b]
As of January 13, 2025, the won-dollar exchange rate opened at 1,473.2 won, rising by 8.2 won from the previous day's closing price. This marks the first time in five transactions that the rate exceeded 1,470 won since January 6. The increase was influenced by a strong U.S. non-farm jobs report released on January 10, which showed an increase of 256,000 jobs, surpassing the expected 155,000. The dollar index reached 109.70, the highest since early November 2022. Economist Wi Jae-hyun predicts the exchange rate will rise further in the mid-1,470 won range, despite an upcoming U.S. Consumer Price Index announcement. [d585b5c1]
Experts now predict that the won-dollar exchange rate may surpass 1,500 won, with forecasts indicating it could hit this mark as early as January 2025. The exchange rate rose from 1,300 won to 1,470 won following Donald Trump's election in November 2024, driven by concerns over his protectionist policies and the '12·3 Martial Law Incident.' As of December 30, 2024, the exchange rate was recorded at 1,472 won, and analysts expect it to rise to 1,490 won before Trump's inauguration. [ad94d72b]
In light of these developments, the Korean Development Institute (KDI) has warned that the won could potentially reach 1,500 won per dollar if the political crisis continues. Their report, submitted to Rep. Lee In-young on December 29, indicates that typical fluctuations could see the exchange rate range between 1,420 and 1,539 won without external shocks. The KDI emphasizes the complex economic implications of a weaker won and advises against excessive intervention in the foreign exchange market. [193aba2b]
To combat the currency's decline, the South Korean government has expanded its foreign exchange swap line from $50 billion to $65 billion, aiming to enhance liquidity for businesses facing rising costs due to the depreciation. Additionally, foreign exchange regulations have been relaxed to support economic activity. [e4742933]
The implications of the won's decline are multifaceted. While importers are struggling with increased costs, exporters may benefit from a more competitive position due to the weaker currency. However, the overall economic landscape remains precarious, reflecting broader challenges for emerging markets amid global economic pressures. [e4742933]
In the context of South Korea's internal challenges, the Business Survey Index (BSI) has recorded its steepest decline in nearly five years for January 2025, indicating significant pessimism among businesses. The BSI index fell to 84.6, down 12.7 points from 97.3, reflecting a negative outlook for 34 consecutive months. [4a773b40]
Political instability continues to loom large, with 69.3% of surveyed companies expecting worsening labor relations next year. A state-run research institute predicts that exports to the U.S. could shrink by over 20 trillion won ($14 billion) if higher tariffs are imposed by the Trump administration, further complicating the economic landscape. [4a773b40]
As small businesses struggle with these economic pressures, experts suggest that the focus should shift towards addressing structural issues and investing in next-generation industries to foster long-term economic resilience. [2fc22b3e]