Since the Middle East war, the won's decline against the U.S. dollar has been the third largest among major countries worldwide. The won has fallen more sharply than the currencies of Argentina and Southeast Asia, whose economies rank below Korea's.
This is prompting analysis that dollar strength alone cannot explain the won's weakness. First, because Korea's base rate is lower than the U.S. rate, outflows have been large even among emerging markets.
Some also point to the fact that Korea's broad money (M2) growth rate is higher than the U.S. as a cause. The Bank of Korea (BOK) counters that "given that the U.S. has fewer M2 components than Korea, cross-country comparisons are not appropriate."
◇ Won's drop ranks third among 42 countries
According to the Bank of Korea's Economic Statistics System (ECOS) on the 8th, on the close of the 5th, the won was down 6.9% from Feb. 27, before the Middle East war. The magnitude of the won's decline was the third largest among 42 currencies for which the Bank of Korea (BOK) compiles exchange rates, after the Egyptian pound at 8.1% and the Indonesian rupiah at 7.6%.
The shift by investors toward safe assets after the Middle East war has strengthened the U.S. dollar. Most emerging-market currency fell, and Korea's drop was among the steepest. Compared with major Southeast Asian currencies—the Philippine peso (-6.8%), the Thai baht (-5.1%), the Vietnamese dong (-1.0%)—and the Argentine peso (-2.0%), the won fell conspicuously more.
On this day as well, the won-dollar exchange rate rose by more than 10 won and is trading in the 1,550-won range.
◇ Heavy net selling of stocks... rate gap between the U.S. and Korea also a factor
The won's slide is largely due to heavy net selling of domestic stocks by foreign investors. Through the first half of last year, foreign investors were net buyers on a large scale, centered on Korean semiconductor blue chips such as Samsung Electronics and SK hynix, but they turned to net selling in the second half. Because the net purchases had been larger than in other countries, net selling to lock in gains has also been sizable.
The interest rate gap with the United States is also cited as a reason why foreign funds are flowing out of Korea more heavily than in other emerging markets. Investors are pulling money from lower-rate Korea and investing in the relatively higher-rate U.S. The U.S. base rate is 3.50–3.75% per year. Korea's is 2.5% per year, up to 1.25 percentage points lower. Looking at emerging-market policy rates, Argentina's is 29% per year and the Philippines' is 4.5% per year, generally higher than the U.S.
◇ M2 growth rate 5.6%, higher than the U.S.... "Comparing M2 with the U.S. is inappropriate"
Some have consistently argued that a high "broad money (M2)" growth rate is one of the causes of the exchange rate's rise. According to the Bank of Korea (BOK), the average M2 balance in March was 4,132.1 trillion won, up 5.6% from a year earlier. The growth rate was the highest since March 2023 (5.6%). The U.S. M2 growth rate was reportedly in the 4% range as of March.
This is leading to claims that the higher M2 growth rate than in the U.S. is one of the factors pushing the exchange rate up. The idea is that increased won supply has dragged down its value.
However, given that U.S. consumer price inflation is higher than Korea's, some note it is hard to conclude that money supply growth drove the exchange rate higher. Korea's consumer inflation was ▲ 2% in January–February ▲ 2.2% in March ▲ 2.6% in April ▲ 3.1% in May. The U.S. posted ▲ 2.4% in January–February ▲ 3.3% in March ▲ 3.8% in April–May, higher than Korea. It is difficult to argue for a causal chain in which money supply growth makes Korean prices higher than U.S. prices, leading consumers to buy more U.S. goods than Korean goods and thus weakening the won.
The Bank of Korea (BOK) also points out that "Korea's M2 includes more financial products than the U.S." Korea's M2 includes cash, time deposits with maturities under two years, and MMFs. The Bank of Korea (BOK) had included stock- and bond-type exchange-traded funds (ETFs) in M2, but began excluding them in October last year in line with International Monetary Fund (IMF) recommendations. Even so, it still has more components than the U.S. The U.S. reportedly includes only cash, small time deposits under $100,000, and retail MMFs.