Won Continues Downward Spiral

The Korean won is weakening rapidly, which works in favor of exports but make imports of some key materials more expensive and exacerbates inflation. An exodus of foreign capital from the Korean stock and bond markets also poses risks.

The won closed at W1,265.20 on Wednesday, down W14.4 from the previous session and W26 over the last three days. It was the first time in 25 months that the won fell below W1,265. Analysts warn it could weaken to W1,300 for the first time since the global financial crisis in 2008.

The main reason is that the dollar soared to a two-year high after the U.S. Federal Reserve announced it will increase interest rates sharply in order to tame inflation, which is at the highest level in 41 years. The Russian invasion of Ukraine has prompted global investors to favor safe-haven assets like the greenback.

Park Sung-wook at the Korea Institute of Finance said, "There is a risk of bigger shocks caused by an exodus of foreign capital."

If panic escalates in financial markets, the won could weaken further, unlike the euro and Japanese yen, which are used internationally. The European Central Bank and the Bank of Japan are maintaining their zero-interest-rate policy, but the Bank of Korea already increased the base rate, leaving fewer options in coping with inflationary pressure.

The BOK has hiked the base rate four times since August last year to 1.5 percent, which is already higher than the 1.25 percent before the coronavirus pandemic. Sung Tae-yoon at Yonsei University said, "We face the risk of a complex crisis of stagflation or rising consumer prices compounded by a weak economy combined with market uncertainties."