The global artificial intelligence boom has significantly boosted chip demand for South Korean tech giants, including SK Hynix and Samsung Electronics, propelling the benchmark KOSPI index to surge over 150% in the past year. However, despite the KOSPI outperforming all other major global stock markets, the South Korean won remains one of Asia's weakest currencies. This disconnect is unusual. Typically, strong stock market gains accompany currency strength, especially in export-oriented economies like South Korea. What has happened to the won?
The won has been declining steadily since mid-2025, but in late March, it broke through the psychologically significant threshold of 1,500 won per US dollar, hitting its lowest level since the 2009 global financial crisis. This drop was primarily driven by escalating geopolitical tensions from the US-Iran war and capital outflows as foreign investors sold South Korean securities in favor of safer assets. The won later recovered some ground, but as Middle East tensions intensified and oil prices surged above $100 per barrel in mid-May, it fell back near March lows. This is critical because South Korea relies almost entirely on imports for its energy needs, meaning higher oil prices increase demand for US dollars, putting further pressure on the won.
This year, the won has been one of Asia's worst-performing currencies. Despite the KOSPI breaking the 8,000-point milestone for the first time, the won has depreciated by about 4% since early 2026.
What is the traditional correlation between the South Korean stock market and the won?
Historically, the value of the won has largely moved in sync with stock market trends. This is because foreign investors have long played a significant role in the South Korean market, and purchasing South Korean stocks typically requires them to exchange foreign currency for won, increasing demand for the won and thus boosting its value. South Korea's export-oriented economy reinforces this relationship. During periods of strong exports and substantial current account surpluses—meaning South Korea's exports and overseas income exceed imports and foreign exchange outflows—exporters like Samsung Electronics convert more overseas earnings into won, increasing demand for the currency. Strong exports also tend to enhance the appeal of South Korean assets to global investors, attracting more capital into local stocks and bonds and reinforcing this cycle.
Why has the relationship between the KOSPI and the won changed?
The Bank of Korea notes that the composition of overseas assets accumulated through current account surpluses has shifted over time. In the past, most of the surplus flowed into the central bank's foreign exchange reserves. Today, an increasing share is directed toward private sector securities investments. This shift coincides with South Korea's rapidly aging population, as households and institutional investors seek overseas investments for higher returns on savings. As investment inflows have grown, their influence on the won's exchange rate has surpassed that of trade flows like imports and exports. According to the Bank of Korea, the relationship between South Korea's current account surplus and a stronger won began to weaken around 2015.
The structure of the South Korean stock market has also evolved. Local investors are increasingly participating, absorbing stocks sold by foreign investors, which helps sustain the market's upward momentum but does not stimulate overseas demand for the won as it once did.
The won itself faces additional pressures. The war involving the US, Israel, and Iran has driven up oil prices, increasing South Korea's import costs and exerting downward pressure on the won. Simultaneously, geopolitical tensions from the conflict have dampened global risk appetite, impacting the won as it is widely seen as a barometer for global trade and economic growth.
Furthermore, South Korea's commitment to invest $350 billion in the US as part of a broader trade agreement with Washington has raised concerns that this plan could add extra pressure on the won, as it would require substantial sales of won for US dollars to fund the investments.
Is South Korea concerned about the won's depreciation?
Yes, and this concern is not new. In December last year, the South Korean government introduced a series of measures to encourage capital to remain within the country. These include tax incentives for reinvesting proceeds from overseas equity sales domestically and raising the tax-exempt proportion of dividends from overseas subsidiaries from 95% to 100%. To curb speculative foreign exchange trading, authorities have also intensified verbal interventions. Verbal warnings from the Ministry of Economy and Finance and the central bank—often interpreted by traders as precursors to actual intervention—increased toward the end of last year, indicating official concern over excessive currency volatility. Data from the Bank of Korea shows that South Korea's foreign exchange authorities net sold $22.5 billion in the fourth quarter of 2025 to defend the won.
However, the government's efforts to curb the won's weakness have had limited effect. Although the won recovered somewhat earlier this year, it weakened again following the outbreak of the Iran-Iraq war. In April, South Korea's largest pension fund, the National Pension Service (NPS), announced the removal of currency hedging limits, a move expected to support the won by increasing demand for the currency. Meanwhile, as policymakers seek more lasting solutions, discussions between South Korea and the US over a potential currency swap agreement have regained momentum.
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