Why investors are fleeing the won

Cho Hyun-suk
 
The author is the economy news editor of the JoongAng Ilbo. 

“Why do foreign investors keep selling Korean stocks?”
 
“Because they think prices will eventually fall. If they believed stocks would continue rising, they would keep holding them.”
 
“Why is everyone selling won and buying dollars?”
 
“Because they expect the won to weaken further.”
 
This exchange took place with a former foreign exchange insider who spent years overseeing Korea’s currency markets. The questions seemed difficult, but the answers were simple. People sell assets when they believe prices will fall. Yet is that really the whole story?
 
A screen at Hana Bank’s trading room in Jung District, entral Seoul, shows closing prices on June 5, 2026. The won-dollar exchange rate closed daytime trading at 3:30 p.m. at 1,539.10 won. [NEWS1]

 
In after-hours trading on Friday, the won-dollar exchange rate broke through 1,550 won per dollar. That left less than 50 won from the intraday record of 1,597 won set on March 6, 2009, during the global financial crisis. The all-time high of 1,962 won, reached during the 1997 Asian financial crisis, remains distant. Still, the current situation is alarming.
 
During the 1997 crisis, the exchange rate stayed above 1,500 won for only 57 days. This year, it has already exceeded that level for 26 days. If the trend continues for another month, the duration will rival one of the most difficult periods in Korea’s economic history.
 
There has been no major financial collapse and no economic crisis comparable to those earlier episodes. Yet Korea’s foreign exchange market resembles a place of evacuation. Foreign and domestic investors alike are selling won and accumulating dollars.
 
Japan, which is also facing a weakening currency, has responded aggressively. Last month it spent a record 11.7 trillion yen ($73.13 billion), about 114 trillion won, from its foreign exchange reserves to support the yen. Japanese Finance Minister Katayama Satsuki declared that authorities were prepared to take “decisive measures” against excessive currency movements. Even so, the 160-yen-per-dollar level remains under pressure.
 
Korea’s response has appeared far less forceful. Officials have largely relied on verbal warnings. Phrases such as “heightened vigilance,” “close monitoring” and promises of action against excessive market movements are the same expressions heard when the exchange rate was much lower. Markets have shown little reaction. Korea has intervened using foreign exchange reserves, but on a much smaller scale than Japan.

 
The current situation recalls lessons from the Asian financial crisis. In a study published after the turmoil of 1997, the International Monetary Fund concluded that speculative attacks against emerging Asian currencies were driven less by economic fundamentals than by expectations that those currencies would depreciate.
 
That finding remains relevant today. Global foreign exchange markets process trillions of dollars in transactions every day. Currency trading is not merely a reflection of economic indicators but also a contest of expectations and psychology.
 
Viewed from that perspective, Korea’s exchange rate appears puzzling. The country is enjoying record exports driven by semiconductors, a historically large current account surplus and a stock market that has climbed above 8,000 points. Economic growth has exceeded 2 percent and is approaching 3 percent. Yet the won trades at levels associated with crisis.
 
One reason is that expectations often matter more than present conditions. Shin Hyun-song, governor of the Bank of Korea, has signaled a possible interest rate increase in July. Ordinarily, higher rates would support the currency. Yet markets also expect the United States to raise rates because inflation remains elevated and employment indicators remain strong. As a result, the interest rate gap between Korea and the United States may not narrow significantly.
 
History offers examples of policymakers who understood the importance of shaping expectations.
 

Bank of Korea's new governor Shin Hyun-song gives an inaugural address at the central bank in central Seoul on April 21. Shin signaled a more flexible approach to monetary policy in the speech amid geopolitical uncertainty in the Middle East. [BOK]

 
“Keep at it” became the defining slogan of Paul Volcker, the former chairman of the U.S. Federal Reserve. His determination helped restore confidence in the dollar during a period of severe inflation and monetary instability.
 
“Whatever it takes” was the famous pledge made by Mario Draghi, then-president of the European Central Bank, in 2012 when the eurozone faced a debt crisis. The statement helped calm markets and became one of the most influential interventions in modern central banking history.
 
No one is necessarily demanding such dramatic rhetoric from Korea’s policymakers. Yet questions remain. If authorities do not act decisively now, at what point will they intervene more aggressively? Will action come only when the exchange rate reaches 1,600 won or even 1,700 won per dollar?
 
The costs of a weak currency are already becoming evident through higher inflation and borrowing costs.
 
In "Fault Lines" (2010), economist Raghuram Rajan argued that governments should address risks before they become crises. It is far easier, he wrote, to extinguish a small fire before it spreads than to battle a blaze after it has grown.
 
That raises a final question for policymakers. When will they draw the sword? More importantly, is there a sword — a credible strategy — in the scabbard at all?