With the won-dollar exchange rate staying above 1,400 won in a high-rate phase, a call emerged to consider a gradual benchmark rate increase to stabilize the currency. Structural reforms such as improving the investment environment for corporations and easing regulations were also flagged as urgent tasks.
The Asian Finance Association held a discussion on "exchange rate outlook and challenges for interest rate policy" at the 2026 Joint Economics Conference on the morning of Feb. 5 at Chung-Ang University in Heukseok-dong, Seoul. Participants included Kim Jeong-sik, professor in the Department of Economics at Yonsei University; Kim Tae-jun, former president of the Korea Institute of Finance; Baek Seung-gwan, professor in the Department of Economics at Hongik University; and Shin Gwan-ho, professor in the Department of Economics at Korea University.
Participants noted that the won's weakness has clearly deepened since 2021. The won-dollar rate, which averaged 1,128.9 won from 2000 to 2020, jumped to an average of 1,304.9 won between 2021 and 2025. Volatility also widened. The share of days when the intraday average exchange-rate move exceeded 10 won was only 6.46% from 2010 to 2019, but nearly doubled to 11.63% from 2021 to 2025.
A solidifying structure of capital outflows was cited as the backdrop for this trend. As the National Pension Service and individual investors increased overseas securities investment and corporations expanded outbound direct investment, pressure for capital outflows grew, analysts said. In particular, the expansion of U.S. stock investing by individual investors and the rising share of overseas investments by pension funds were said to be creating constant upward pressure on the exchange rate.
Kim Jeong-sik, professor of economics at Yonsei University, pointed to the United States' growth-rate edge as the fundamental driver of outflows. Kim said, "Since 2021, Korea's potential growth rate has remained below that of the United States," adding, "As the U.S. growth rate stays high, corporations' profits and stock prices are rising, drawing global capital into the United States."
The government's expansionary fiscal stance was also named as a structural factor pushing up the exchange rate. When fiscal spending increases and liquidity spreads through the market, inflation expectations rise, leading to a decline in the won's real value. Kim said, "If a drop in the won's value is expected, demand to hold dollars increases, creating upward pressure on the exchange rate."
Kim said, "To resolve a situation where excessive liquidity is accompanied by a rising exchange rate, it is time to carefully consider a gradual shift in rate policy, namely the possibility of a hike." He added, however, "A rapid rate increase can burst asset-market bubbles and cause financial instability, so the pace needs to be managed."
Baek Seung-gwan, professor of economics at Hongik University, stressed the need for deregulation. He said, "As of 2024, Korea's productivity ranks 24th among 36 member countries of the Organization for Economic Cooperation and Development (OECD)," adding, "To lift the growth rate, regulations in services, networks, trade, and investment should be boldly eased, and anti-business policies such as the yellow envelope law, a new labor law aimed at strengthening the bargaining rights of subcontract workers, should be reviewed."
Jeong Yeong-sik, senior research fellow at the Korea Institute for International Economic Policy (KIEP), proposed a strategy to stabilize the foreign exchange market by using external assets. He said, "If you combine the National Pension Service, retirement pensions, and personal pensions, the total is expected to exceed 5,000 trillion won by 2040," adding, "The positive effects of expanding external assets should be linked to exchange-rate stability and financial market stability."
As a short-term response, Jeong also proposed leveraging coordination between the foreign exchange authorities and the National Pension Service to use the Federal Reserve's FIMA repo facility. The FIMA repo allows the Fed to lend dollars for up to six months against U.S. Government Bonds held by overseas Central Bank and international organizations as collateral. It was introduced during the COVID-19 pandemic in 2020.