As the exchange rate of the won to the U.S. dollar (won-dollar exchange rate) approaches 1,500 won, an analysis has emerged that domestic fundamentals and factors such as U.S. President-elect Donald Trump and China are driving up the exchange rate.
On the 3rd, Lee Seung-jae from the Research Institute at iM Securities noted, “In December of last year, the won experienced an unprecedented depreciation rate,” adding that “the exchange rate is important in showing the country’s credibility.”
On the last trading day of last year, the closing exchange rate of the won to the dollar stood at 1,472.5 won. After former President Trump was re-elected in the U.S. elections, the era of 1,400 won exchange rate emerged, but it soared to the 1,480 won range amid the imposition of martial law domestically.
Regarding this, the Research Institute analyst identified domestic fundamental risk as one reason, stating, “It is evident that the strength of the domestic economy is weakening” and highlighted that “the most serious sector is consumption.”
In December of last year, the Consumer Sentiment Index (CCSI) recorded 88.4, a sharp decline of 12.3 points from the previous month. In terms of the drop, it marks the largest decrease since March 2020, which was 18.3 points. Additionally, it fell below the baseline of 100 for the first time since May of last year.
The Research Institute analyst stated, “Even the exports, which had been driving growth, have started to decline,” adding, “Exports last month increased by 6.6% compared to the same month last year.” He continued, “Although it improved from the 1.4% increase in November, it has recorded single-digit growth rates for four consecutive months.”
The Research Institute analyst also noted that Trump's risk is a concern. He said, “The policies pursued by Trump create an environment that is bound to lead to a strong dollar, high interest rates, and high inflation,” predicting that “especially tariffs could be the biggest obstacle.”
If tariffs on major imported goods, starting with tariffs on China, are imposed, it can lead to an increase in prices, which may negatively impact the Federal Reserve's (Fed) trend of lowering interest rates. In fact, the Fed showed concern over prices by revising its economic outlook in December, raising its 2025 personal consumption expenditure (PCE) inflation forecast to 2.5%.
The Research Institute analyst explained, “This can be said to partially reflect the economic ripple effect of Trump’s policies,” adding that “if the Fed’s rate cut is delayed, the gap between domestic rates needing a cut due to economic downturn will widen, leading to upward pressure on the exchange rate.”
The final risk exacerbating the high exchange rate is China. The Research Institute analyst stated, “The Chinese risk can be broadly represented by two factors,” explaining that “the delayed recovery of China’s economy adversely affects the domestic economy and that being left behind in technological and industrial competition with China.”
China's economy is suffering from a sluggish domestic market due to a delay in the recovery of the real estate market. Since the funds locked in the real estate market are not circulating in the market, no matter how much easing measures are implemented, they are useless.
The Research Institute analyst noted, “This is bound to have a direct impact on China’s export economy, and furthermore, economic growth,” predicting that “It will act as a pressure on the yuan's weakness, adversely affecting the value of the won, which has a high correlation with the yuan.”
Regarding the technological competition with China, he stated, “Chinese electric vehicle corporations like BYD have announced their plans to launch an electric vehicle market in Korea early this year,” adding, “There is a high possibility that the market share of domestic companies will decline.” He continued, “The penetration of Chinese industry into the domestic market can directly lead to weakening the competitiveness of domestic industries, acting as pressure on the depreciation of the won.”