Korea's Won Weakness and Policy Response: Implications for Currency and Equity Markets

The South Korean won has faced persistent depreciation pressures since 2023, reaching a 16-year low of 1,483.5 per dollar in December 2025. This volatility has prompted the Bank of Korea (BOK) to implement a range of interventions, including foreign exchange levy exemptions, targeted fiscal measures, and monetary policy adjustments. While these efforts have provided temporary stabilization, their long-term efficacy remains uncertain, raising critical questions for investors navigating currency and equity market risks in a fragile macroeconomic environment.

Policy Responses and Mixed Outcomes

The BOK's strategy has centered on mitigating won volatility through both direct and indirect measures. In late 2025, the central bank exempted foreign exchange levies to ease pressure on the currency as it approached 1,480 per dollar. Concurrently, the Finance Ministry established a task force to monitor exporters' currency-conversion behavior and explore tax incentives to encourage foreign-currency earnings to be converted into won. These actions were complemented by a cautious monetary policy stance, with the BOK maintaining its benchmark interest rate at 2.5% through November 2025 to balance inflationary pressures and financial stability.

However, the interventions have yielded mixed results. While the won temporarily strengthened to 1,430 per dollar in early December 2025 following verbal warnings and FX swap arrangements with the National Pension Service, the currency continued to depreciate by over 8% in the second half of 2025. This underscores the challenge of countering structural headwinds, including a widening U.S.-Korea interest rate differential and global trade tensions.

Assessing Intervention Efficacy

The BOK's foreign exchange interventions have involved significant fiscal and monetary resources. In 2024 alone, the central bank executed $17.54 billion in net forex sales, with cumulative interventions reaching $11.2 billion in 2024 and $9.6 billion in 2023. These measures aimed to smooth exchange rate volatility and build foreign exchange reserves as a buffer against external shocks. Yet, the depletion of Korea's FX reserves by $2.6 billion in December 2025-the steepest decline in 28 years- highlights the sustainability risks of such interventions.

Governor Rhee Chang Yong has emphasized the need to monitor financial imbalances and external risks while maintaining an accommodative policy. This cautious approach reflects the BOK's awareness of the dual challenge: stabilizing the won without exacerbating inflation or undermining domestic economic growth. For instance, a weaker won has increased inflationary pressures, with the central bank noting a risk of exceeding 2025 inflation forecasts due to higher import costs.

Implications for Investment Risk

The BOK's interventions have had nuanced effects on South Korea's equity market. By reducing abrupt exchange rate movements, the central bank has helped stabilize investor sentiment, mitigating the risk of currency-driven capital flight. The introduction of 24-hour FX trading in July 2026 is expected to further enhance liquidity and reduce short-term volatility. However, the broader economic environment remains fraught with risks.

A weaker won has accelerated capital outflows, complicating efforts to attract foreign investment. While the government has eased FX rules-such as raising foreign bank subsidiaries' forward position limits and expanding loan access for exporters-these measures have not fully reversed the trend. For equity investors, this creates a paradox: a stable won supported by BOK interventions could bolster market confidence, but persistent depreciation risks inflation and erode corporate margins, particularly for import-dependent sectors.

Conclusion: Navigating Uncertainty

The BOK's interventions have provided temporary relief for the won, but their long-term effectiveness hinges on addressing structural vulnerabilities. Investors must weigh the central bank's capacity to sustain costly interventions against the risks of a weaker won, including imported inflation and capital outflows. While the BOK's cautious policy stance and liquidity-enhancing measures offer some reassurance, the volatile FX environment underscores the need for hedging strategies and diversified portfolios. As global trade dynamics and monetary policy divergences persist, Korea's currency and equity markets will remain sensitive to both domestic policy actions and external shocks.