South Korean won hits 15-year low: here's why

The South Korean won plunged to its weakest level in 15 years on Thursday, reflecting heightened economic and political risks.

The currency was trading at 1,449.9 per dollar in early onshore trade, down 0.96% from the previous session.

This marks the lowest level for the won since March 2009.

The drop comes after the US Federal Reserve adopted a cautious approach to future interest rate cuts, coupled with domestic instability stemming from President Yoon Suk Yeol’s controversial martial law order earlier this month.

The won has now weakened 11% year-to-date, making it the worst-performing Asian currency of 2024.

US Fed's hawkish stance adds pressure

On Wednesday, the US Federal Reserve cut interest rates as widely anticipated, but Chair Jerome Powell’s remarks signalled that further cuts would depend on sustained progress in controlling inflation.

This hawkish stance boosted the dollar, exacerbating the won’s decline.

The dollar index, which measures the US currency against six major currencies, climbed to a two-year high of 108.086, up 0.05%, reaching its highest level since November 2022.

The South Korean central bank has flagged significant downside risks to the country’s economic growth, compounding the pressure on its currency.

The Bank of Korea has cited the lingering economic effects of the Dec. 3 martial law order, warning that the nation’s growth forecasts for 2024 and 2025 could face substantial downward revisions.

The won’s decline extends its losses for a third consecutive month, dropping 3.9% against the dollar in December.

Political instability undermines investor confidence

South Korea’s political landscape has further dampened investor sentiment.

President Yoon’s brief imposition of martial law earlier this month has raised concerns over governance and stability.

This political uncertainty has contributed to a 2% drop in the benchmark KOSPI index, driven by foreign investors offloading South Korean equities.

In response to the market volatility, South Korea’s finance minister pledged swift and decisive interventions if fluctuations in financial markets were deemed excessive.

Measures under consideration include stabilisation policies aimed at containing foreign exchange volatility.

Despite assurances from policymakers, the won has remained under intense pressure.

Market participants suggest that authorities may be attempting to defend the 1,450 level, making it challenging for traders to bet against the currency.

South Korea’s financial regulator has instructed local banks to manage foreign exchange transactions and loans flexibly to mitigate market stress.

Year-to-date performance marks a dismal outlook for the won

The won’s performance in 2024 has been its worst since the global financial crisis of 2008.

Its year-to-date decline of 11% highlights the currency’s vulnerability to external shocks and domestic challenges.

Analysts predict that sustained pressure from a strong US dollar and political instability could further weigh on the currency in the coming months.

The downturn in the won has also reverberated through South Korea’s equity markets.

The KOSPI index fell 2% on Thursday, with foreign investors pulling out of local shares.

This marks a continuation of a bearish trend in South Korean stocks, driven by concerns over economic slowdown and governance issues.