Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Korean Won Crisis How South Korea Is Fighting Currency Collapse
Transcript
- Lucas: South Korea's won has lost nearly ten percent against the dollar in just the past five trading sessions—that is a collapse by any standard, and it's happening right now. Luna: And the KOSPI is down almost the same amount. I mean, we're seeing a full-blown currency and equity rout in one of the world's most important export economies. Lucas: Exactly. Let's put some numbers on this. The trade-weighted dollar index just hit 120.4 as of mid-June, and the won has been one of the biggest casualties. We're looking at a won-dollar rate that has blown past the 1,400 level—levels not seen since the 1997 Asian financial crisis. Luna: And it's not just Korea. Look at the data we have for the ETFs this week: the Korea ETF, ticker e w y, is down nearly ten percent in five days. Compare that to Brazil's e w z, which is actually up a bit. The divergence is stark. Lucas: Right. So the question is why Korea specifically? And the answer starts with its reliance on exports—especially semiconductors, autos, and ships. When the dollar strengthens this aggressively, Korean goods become more expensive for buyers using other currencies. And that hits corporate earnings, which hits the stock market, which then triggers foreign capital outflows, which hits the won even harder. It's a vicious cycle. Luna: And it's happening while China's yuan is also weakening—it's at 6.77 per dollar now, up from 6.76 last week. So Korea is getting squeezed from both sides: a strong dollar and a cheaper competitor in China. Lucas: That's the real knife edge. Korea's biggest export rival is China in many categories—memory chips, displays, ships. If the yuan weakens, Chinese goods get cheaper globally, and Korean manufacturers lose market share. So the Bank of Korea is in a bind: do they raise rates to defend the won, which would slow the domestic economy, or let it fall and risk inflation from more expensive imports? Luna: They've already been hiking. The benchmark rate is at three point five percent, and they intervened in the FX market earlier this week—reportedly selling dollars to slow the won's decline. But the effect seems to have been minimal. Lucas: Intervention rarely works for long unless it's backed by a credible policy shift. And Korea's problem is structural: it has a large current account surplus, which should normally support the won, but capital flows are overwhelming that. Foreign investors are pulling money out of Korean equities and bonds because US yields are so attractive—the ten-year Treasury is yielding over four point seven percent. Luna: So it's basically the carry trade in reverse. Money is flowing to the dollar, and emerging markets like Korea are getting drained. Lucas: Exactly. And here's a detail that doesn't get enough attention: Korea's foreign exchange reserves are still ample—around 420 billion dollars—but they've been declining for months. The central bank is burning reserves to defend the won. That can work for a while, but if the dollar keeps rallying, it's a losing battle. Luna: And speaking of the dollar rally, it's not just about US rates. There's geopolitical tension too. The headlines today include Trump threatening Iran again, and there are reports of attacks in Kuwait and Bahrain. That kind of uncertainty tends to push money into safe havens like the dollar. Lucas: Right, and Korea is particularly exposed geopolitically, given North Korea. So it's a triple hit: strong dollar, export competition from a weaker yuan, and geopolitical risk. The won is caught in a perfect storm. Luna: Let's talk about what the Bank of Korea could do next. Some analysts are calling for an emergency rate hike—maybe fifty basis points or more. But that would risk crushing domestic demand and housing, which is already under pressure. Lucas: It's a tough call. If they hike aggressively, they might slow the won's decline, but they could also tip the economy into recession. Korea's GDP growth is already forecast to be below two percent this year. The other option is to tighten capital controls—limit how much foreign investors can pull out—but that would spook markets even more and hurt Korea's reputation as a free-market economy. Luna: So there's no good option. It's basically choosing which pain to endure. Lucas: Exactly. And that's the story of many emerging markets right now. But Korea is a special case because it's a developed EM—it has deep financial markets, a strong industrial base, and a history of resilience. If Korea can't defend its currency, what does that say for the rest? Luna: Yeah, I mean, you look at the EM ETF data for this week: the broad EM funds like EEM and VWO are down four to five percent. But Korea is down ten. It's the worst performer among major EMs. Lucas: And yet, there's a contrarian view. Some investors argue that this selloff is overdone. Korea's fundamentals—low debt, high savings, strong export sector—are still solid. The won is cheap by historical standards. If the dollar rally stalls, Korea could bounce back sharply. Luna: That's a big 'if' though. The dollar index is at 120 and still climbing. The Fed is not cutting rates anytime soon. So the pressure is likely to continue. Lucas: I think the key thing to watch is whether the Bank of Korea coordinates with other central banks—maybe a swap line with the Fed, like they did during the pandemic. That would provide dollar liquidity and ease the pressure. Luna: But that would require the Fed to be willing. And right now, the Fed is more focused on fighting inflation at home than helping EM central banks. Lucas: That's the reality. And it's a reminder that in a world of dollar dominance, emerging markets are often at the mercy of US monetary policy. Korea is learning that lesson the hard way. Luna: You know, Lucas, talking about the won's slide and the pressure on Korea's economy, it makes me think about the economics of running a show like this. We dig into these topics every day, and it takes a lot of research and time. Lucas: Yeah, it really does. And we're able to do it because a small group of listeners supports us directly. There are no ads on this podcast—no sponsors pushing a narrative. It's just us, and the people who chip in through buy me a coffee dot com slash fexingo. Luna: Right. That support is what keeps us independent and allows us to go deep on stories like this. If you find value in what we do, it's a simple way to keep it going. Lucas: Exactly. And we're grateful for every bit of support. It helps us stay focused on the data and the analysis without any outside influence. Luna: So back to Korea—what are the specific triggers we should watch in the coming days? Lucas: First, any official statement from the Bank of Korea or the finance ministry. They might announce more aggressive intervention or a rate decision. Second, the US jobs report next week—if it's strong, the dollar could rally further, making things worse. Third, keep an eye on China's trade data; if Chinese exports weaken, it might ease competition for Korea, but if they strengthen, it's more pressure. Luna: And the KOSPI has already breached the 2,400 level. Technically, that's a key support. If it breaks below 2,300, it could trigger another wave of selling. Lucas: Right. And on the currency side, if the won breaks above 1,450 per dollar, that would be a new psychological barrier. The last time it was there was during the global financial crisis. Luna: So for investors, the message is: don't try to catch a falling knife. But for long-term value investors, this might be a buying opportunity if you believe Korea's fundamentals will reassert themselves. Lucas: Exactly. And that's the tension in emerging markets right now. The short-term pain is real, but the long-term story for countries like Korea—with their innovation, education, and infrastructure—is still intact. The question is whether the policy response can bridge that gap. Luna: Well, we'll be watching. Thanks for joining us on this episode of The Emerging Markets Podcast. We'll see you next time. Lucas: Take care, everyone.