Exchange Rate Rise Is Structural, But Not Cause for Concern [Economic Policy Zoom-In]

The won-dollar exchange rate recently climbed into the 1,460 won range, reaching its highest level in six months. Several short-term factors are influencing this trend: the strengthening of the dollar amid expectations that the U.S. federal government shutdown (temporary suspension of government work) will end; the rise in the yen-dollar exchange rate and its correlation with the won-dollar rate following Japanese Prime Minister Sanae Takaichi’s message on expansionary fiscal policy; and the delayed announcement of the implementation date for lowering U.S. tariffs to 15%.

Structural factors are more important when forecasting the medium- to long-term trajectory of the exchange rate. Notably, the significant increase in overseas stock investments by so-called “Seohak Ants” (Korean individual investors in foreign stocks) has caused overseas securities investments to far exceed the current account surplus. However, experts say that the recent rise in the won-dollar exchange rate is not cause for excessive concern. Overseas investments by these investors have led to a sharp increase in net external financial assets, thereby strengthening the country’s foreign currency position. Additionally, the burden of repaying short-term external debt is not significant, which differentiates the current situation from previous periods of exchange rate spikes. In fact, the rise in the exchange rate could offset the increase in export prices caused by U.S. tariffs, while stable international oil prices and the ongoing semiconductor supercycle are expected to sustain a current account surplus and benefit the economy.

From January to August This Year, Overseas Securities Investment Surpassed Current Account Surplus by 20 Billion Dollars

The rapid increase in overseas securities investment by domestic investors has positive aspects, such as a surge in net external assets and improved investment income (interest and dividends), but it also acts as a factor driving up the won-dollar exchange rate due to capital outflows. The continued surge in overseas securities investment has become a structural factor contributing to the weakening of the won.

From January to August this year alone, overseas securities investments by domestic investors reached 88.7 billion dollars. This is 19.4 billion dollars more than the current account surplus (69.3 billion dollars) over the same period. Since 2020, annual overseas securities investments by domestic investors have exceeded 45 billion dollars every year, reaching as high as 72.2 billion dollars last year. Including the September figure for this year (11.2 billion dollars), the total for January to September is expected to reach 99.8 billion dollars, likely surpassing 100 billion dollars for the year.

Additionally, “retained earnings of overseas subsidiaries”-profits earned by companies through their overseas subsidiaries but not repatriated to Korea-amount to several billion dollars each year.

According to Bank of Korea statistics, retained earnings of overseas subsidiaries (classified as reinvested earnings income) exceeded 15 billion dollars in both 2021 and 2022, but fell to 7.8 billion dollars last year following the Ministry of Economy and Finance’s introduction of the “Non-Taxation of Overseas Subsidiary Dividends” system in 2023. For January to August this year, the figure stands at 5.8 billion dollars, suggesting that the annual total will be similar to last year. However, a 2022 report by the Korea Economic Research Institute titled “Six Reasons to Switch to Source-Based Taxation” estimated that the cumulative retained earnings of overseas affiliates stood at 90.2 billion dollars as of 2021 and are now believed to have surpassed 100 billion dollars.

The Exchange Rate Exceeding 1,500 Won Is Not a Major Crisis

With the won-dollar exchange rate recently rising to the high 1,400 won range-just below the 1,500 won mark-concerns have emerged over the continued increase. However, experts emphasize that there is no need for excessive worry, as the current economic situation is different from past periods of sharp exchange rate spikes, such as the 1997 foreign exchange crisis or the global financial crisis.

There is now a general consensus that an exchange rate in the 1,400 won range represents the new normal. While the situation could change in the future, this trend is expected to persist for the time being.

Park Sanghyun, an economist at iM Securities, stated in a report titled “Is the Exchange Rate Rise Really a Negative Factor?” released on November 10, “The rise in the won-dollar exchange rate is not a major negative factor that will deal a fatal blow to our economy or financial markets, including the stock market. On the contrary, it could even be a positive factor.”

Looking at the long-term trend of the won-dollar exchange rate, it has been on an upward trajectory since the first Trump administration took office in 2017. The average won-dollar exchange rate was 1,137 won from 2016 to 2019, 1,232 won from 2020 to 2023, and has risen to 1,377 won for 2024 to October 2025. The strengthening of the dollar is being driven by the U.S. policy of prioritizing domestic interests, the growing dominance of the digital economy and artificial intelligence, and the resulting rise in American exceptionalism, as well as China’s deflationary risks.

Furthermore, the expansion of domestic capital investment in overseas securities is fueling the new normal of a weaker won. This is not unique to Korea; the phenomenon of American economic exceptionalism is acting as a black hole for global capital, absorbing funds from around the world. The sharp increase in net overseas assets is actually strengthening the country’s foreign currency position. As of the end of the second quarter this year, the share of short-term external debt stood at 22.7% of total external debt and 40.7% of reserve assets, maintaining a stable level. The credit default swap (CDS) premium on five-year government bonds was 17.84 basis points (1bp = 0.01 percentage point) as of September 16, the lowest level in four years since September 2021. As of November 11, it had risen slightly to 22.32 basis points, but this is still 15.43 basis points lower than the end of last year (37.75 basis points).

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