Despite Trump's "Four-Week Short War" Boast... Markets Flash Warning Over 1,500 Won Exchange Rate

Although U.S. President Donald Trump confidently asserted that the war with Iran would last around "four weeks" and would end quickly, analysts in the securities industry say that, given the potential for a prolonged conflict, the possibility of the dollar-won exchange rate exceeding 1,500 won should be kept in mind.

On March 5, Sangsangin Investment & Securities stated, "The market's attention is focused on whether the military clashes in the Middle East will be prolonged. President Trump estimated the operation would last 4 to 5 weeks, but the possibility that the situation will drag on beyond that should not be ruled out."

On February 28, a U.S. military precision strike on a key facility in Tehran, Iran, resulted in the death of Supreme Leader Ayatollah Seyyed Ali Khamenei, which has led to a dramatic escalation of geopolitical risks as Iran's retaliation has spread throughout the Middle East. During overnight trading the previous day, the dollar-won exchange rate temporarily surpassed 1,500 won.

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Choi Yechan, Researcher at Sangsangin Investment & Securities, commented, "As a theocratic state, Iran is fundamentally different from former dictatorships such as Venezuela. It is not an organization that would easily collapse with the removal of a single leader, and the resistance of the Revolutionary Guard, rooted in religion and faith, should not be underestimated." He further explained, "Since there is a high chance that the initially intended U.S. short-term precision strike scenario will not go as planned, the market will continue to reflect a high level of geopolitical risk premium for some time."

In particular, the succession structure and the consolidation of power within Iran are seen as key variables that could prolong the crisis. Currently, Khamenei's second son, Mojtaba Khamenei, who is regarded as the leading candidate for succession, is considered a hardline conservative with significant influence behind the scenes. The Iranian Revolutionary Guard has already declared the closure of the Strait of Hormuz, making its intent to fully resist clear.

Choi added, "If hardliners take center stage, the likelihood of the U.S. achieving a moderate government or proceeding with ceasefire negotiations becomes extremely slim. Historically, external military attacks have only served to fuel anti-American and anti-Israel sentiment within Iran, resulting in internal unity."

The pattern of prolonged warfare has been repeated in past U.S. Middle East wars. In 2001, the war in Afghanistan seemed to tilt in favor of the U.S. after the Taliban regime was toppled within about a month, but it devolved into America's longest war, with U.S. troops stationed there for 20 years and incurring costs of USD 2.3 trillion. Similarly, in the 2003 Iraq War, Baghdad fell in just three weeks, but over the following eight years, the U.S. suffered about 4,500 military casualties amid ongoing civil war and insurgency eradication efforts.

Choi stressed, "Iran is a country that far surpasses Afghanistan or Iraq in terms of population and military power. Since it is difficult to overthrow the regime with airstrikes alone, preparations must be made for the risk of a full-scale ground war and the possibility of the conflict expanding throughout the Middle East."

On the 4th, due to the aftermath of the Middle East situation, the dollar-won exchange rate soared, and the exchange rate is displayed at a currency exchange booth in Myeongdong, Seoul. Photo by Yonhap News.

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The problem is that such geopolitical uncertainty acts as an immediate pressure on the domestic foreign exchange market. South Korea has a high dependence on Middle Eastern oil and is particularly sensitive to geopolitical risks, which has historically caused the won to weaken significantly during Middle East military conflicts. In fact, before and after the U.S. strike on Iran, foreign investors have recorded all-time high net sales in the domestic stock market, reducing their positions in emerging markets. At the same time, a flight to the safe-haven U.S. dollar and concerns over inflation, which have driven up U.S. Treasury yields, are pushing the dollar-won exchange rate higher.

Looking at past cases, after the outbreak of military issues in the Middle East, the dollar-won exchange rate has tended to remain elevated for around 90 days and has not easily returned to lower levels. Choi noted, "Given that this situation includes the unprecedented variable of the closure of the Strait of Hormuz, there is sufficient possibility for the exchange rate to surge further. In the scenario of intensifying war, we should be prepared for the upper limit of the exchange rate to reach as high as 1,525 won."

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