With the won continuing to be relatively weak against the U.S. dollar, KB Securities on the 19th projected that the pace of won strength may be limited.
Ryu Jin-i, a KB Securities researcher, offered this assessment in a report titled "Korea: The unfinished tariff negotiations." Ryu explained that while an agreement between the Korean and U.S. governments on an investment fund for the United States is struggling, problems will remain even after a deal.
First, as Korea's economic fundamentals weaken, it may become difficult to support the won's value. The Korean government has pledged $350 billion, and Korean corporations have separately pledged $150 billion in investments for the United States. In won terms, that is 472.5 trillion won and 202.5 trillion won, respectively. Although the investments will be made over about three years, Ryu projected that domestic investment will inevitably contract significantly, given that last year Korea's annual facility investment totaled 237 trillion won.
To start with, the auto industry, which accounts for 7.6% of Korea's total manufacturing output, may increase overseas investment rather than domestic investment. Ryu said, "Major finished car corporations such as Hyundai Motor and Kia have already expanded production facilities in the United States, but additional localization pressure is mounting due to delays in a (follow-up) agreement," adding, "Parts suppliers, too, may see domestic production activity shrink due to uncertainty over U.S.-bound sales."
Since 2018, Korea's outbound direct investment has exceeded inbound direct investment. That means more investment is flowing out than flowing in. In particular, since 2020, Korea's direct investment in North America has totaled $32.6 billion, and if it agrees to U.S.-related funds, it will have to deploy money into the United States over the next four years at roughly four times the existing level.
Ryu said, "This trend is already constraining the structure in which strong exports translate into a trickle-down effect for domestic demand," adding, "Amid a decline in potential growth, it could serve as additional downward pressure on domestic demand over the medium to long term."
The need to issue Government Bonds domestically for U.S.-bound funds is also a factor that could delay won appreciation. Ryu said, "The government noted it would provide investment for the United States in the form of loans and guarantees through policy finance institutions, but ultimately that funding also has to be raised in Korea through bond issuance by policy finance institutions or direct government equity injections," adding, "With a fiscal deficit already expected in 2026, there is a need to issue additional Government Bonds."
Ryu added, "In this process, dollar demand in the foreign exchange market could surge," and said, "From both a fundamentals perspective and a supply-demand perspective, we see factors that could limit the pace of won appreciation."