As U.S.-Korea tariff negotiations and exchange-rate talks struggle to gain momentum, the won is weakening against major currencies. While the currencies of Organization for Economic Cooperation and Development (OECD) members rose more than 1%, the won fell instead. Experts note that delays in the negotiations are heightening uncertainty in the foreign exchange market and limiting the won's recovery.
◇ Won falls 0.2% over a month… Only three countries, including Korea, see depreciation among OECD members
According to the Bank of Korea's Economic Statistics System (ECOS) on the 20th, the weekly transaction closing price of the won-dollar exchange rate (as of 3:30 p.m.) rose from 1,390.9 won on 19th of the previous month to 1,393.6 won on 19th of this month. Based on this, the depreciation rate of the won against the dollar is 0.2%.
During the same period, among 16 OECD member currencies (excluding Chile, Colombia and Costa Rica), only three currencies depreciated, including the Korean won, Türkiye (-1.2%) and New Zealand (-0.6%). Norway rose 4.3%, followed by Hungary (2.5%), Mexico (2.3%), Switzerland (1.9%), Australia (1.9%) and the Czech Republic (1.7%). The average appreciation rate of OECD member currencies was 1.1%.
It is unusual that the won failed to assert itself during a weak-dollar phase. According to Investing.com, as of 3:41 p.m. on 19th, the U.S. Dollar Index (DXY) stood at 97.45, down 0.10% from a week earlier. The dollar weakened as the possibility of a Federal Reserve (Fed) rate cut grew on the back of weak U.S. jobs data. But the won failed to seize the opportunity.
In the market, the sluggish U.S.-Korea tariff negotiations are cited as a main reason for the won's weakness. While some agreement was reached on tariff issues, differences in the detailed coordination process could not be narrowed, preventing a signing. The exchange-rate talks are in even worse shape. The Korean government recently proposed an unlimited won-dollar currency swap as a condition for expanding investment in the United States, but reports said the U.S. side rejected it, making the impasse official.
Cho Yong-gu, an analyst at Shinyoung Securities, said, "With the U.S.-Korea tariff negotiations still unfinished, additional noise such as Korean workers being expelled from their jobs in the state of Georgia has kept the won from gaining strength," adding, "Not only advanced economies but some emerging-market currencies are gaining against the dollar, yet the won alone continues to show a weak trend."
◇ Impact of economic slowdown and firm dollar demand… "Upside pressure on the exchange rate may increase"
Experts warn that the won's slump may not be only a short-term phenomenon. According to the Bank of Korea's recently released Monetary and Credit Policy Report, U.S. tariff policy alone could lower Korea's economic growth rate by 0.45 percentage point this year and 0.60 percentage point next year. If the economy worsens, foreign funds could flow out and the won could weaken further.
Cho said, "In the first half of this year, as the semiconductor cycle recovered, net exports were in the plus (+), but recently a 25% item-by-item tariff on automobiles has eroded the price competitiveness of Korean products," adding, "If tariffs are applied to semiconductors going forward, even exports will face downward pressure."
Another reason is that dollar demand remains firm as domestic investors increase investments in overseas stocks. According to the Bank of Korea, as of the end of the second quarter, Korea's external financial assets (external investment) totaled $2.6818 trillion, marking an all-time high. That was an increase of $165.1 billion from the end of the first quarter, also the largest quarterly increase on record.
Some also voice concern that exchange-rate volatility could grow in the future. If a $350 billion investment fund in the United States, promised to the U.S. government, is executed, dollar demand could increase further. According to the minutes of the August Monetary Policy Committee meeting released by the Bank of Korea on 16th, committee member Shin Sung-hwan said, "If the investment funds are executed, the exchange rate may face upside pressure," adding, "It is necessary to consult with the United States on related measures to prevent instability in the foreign exchange market from widening."