[The Editors' Verdict] The Real Reason Behind the Plummeting Won and the Resilient Ruble

Despite Similar Circumstances, the Won's Decline Is Steeper
Bold Measures Beyond Market Expectations Needed

The speed at which the value of the Korean won is falling is alarming. The dollar-to-won exchange rate has dropped to the 1,380 won range. There are even talks that the 1,400 won level might break soon. Just the other day, 1,300 won was considered the bottom.

The only consolation is that the won is not the only currency falling. The Japanese yen, which maintains a loose monetary policy, has fallen to 144 yen per dollar. The decline in European currencies such as the euro and the pound is also significant.

The common reason is the strong dollar. As the U.S. Federal Reserve (Fed) accelerates tightening to curb soaring inflation, interest rate gaps between countries widen, and money flows into the dollar. Moreover, since many countries are facing poor economic conditions, the trend of capital flowing into the relatively better-off U.S. is accelerating. The U.S. is both exporting inflation and raising interest rates, but the damage is fully borne by other countries.

Typically, the shock of a strong dollar hits emerging markets first, but this time, both emerging and developed countries are suffering, which is different from the past. The UK, hit by the Brexit shock, is facing a severe economic recession crisis. Germany, the largest economy in Europe, is seeing factories shut down one by one due to gas supply shortages.

So, what about South Korea? Despite government intervention and defensive efforts, the depreciation of the won is relatively larger compared to other countries. According to a Bloomberg report analyzing the dollar exchange rate fluctuations of 31 major currencies, the won has fallen 12.75% this year through the 2nd of this month, ranking eighth in terms of depreciation.

At this point, the argument that a falling won helps exports is just idle talk. Such a drop in the exchange rate means that South Korea’s competitiveness has been seriously damaged. In fact, the Russian ruble, despite the ongoing war, has risen 23.23% against the dollar this year.

South Korea also shares the adverse factors faced by other countries, such as soaring inflation, the U.S.’s ultra-tight monetary policy, China’s economic slowdown, and global supply chain disruptions caused by the Ukraine war.

Nevertheless, the relatively large depreciation of the won reflects the failure to overcome external perceptions that South Korea is particularly vulnerable in times of crisis. As a small open economy, South Korea’s economy inevitably reacts sensitively to external shocks. Additionally, the excessive dependence on China and the negative outlook for the semiconductor industry, which is a key export sector, seem to be influencing factors.

However, we cannot just stand by. There are ways forward. In the long term, we need to reduce excessive dependence on specific industries and countries to prepare for crises. This will allow the economy to act as a buffer and not be shaken by external shocks.

In the short term, bold approaches that exceed market expectations seem necessary. The market is already criticizing the Bank of Korea’s baby step (a 0.25 percentage point base rate hike) last August as a mistake. This month, not only the Fed but also the European Central Bank (ECB) is considering a giant step (a 0.75 percentage point hike).

Awareness from the political sphere and government is also required. Recently, The Economist in the UK analyzed that the biggest reason Russia, despite being at war and facing various Western sanctions, is holding up better than expected is that Putin, who is inexperienced in economics, has entrusted economic matters to experts. It is worth reflecting on how we ourselves are managing the situation.

This content was produced with the assistance of AI translation services.