Seoul: The South Korean won's plummet to a 17-year low has intensified apprehensions regarding inflation and the broader economic ramifications. Analysts caution that the currency might remain below the pivotal 1,500 won-per-dollar threshold for an extended period if the Middle East conflict continues and global oil prices stay elevated.
According to Yonhap News Agency, the won commenced trading at 1,501 per dollar on Monday, a decline of 7.3 won from the previous session. This marks the first time since March 12, 2009, when the nation was grappling with the global financial crisis, that the won breached the 1,500 won mark during intraday trading. Since the onset of the month, the won has depreciated by 3.84 percent against the U.S. dollar following the U.S.-Israeli strike on Iran, experiencing a more significant drop than other key Asian currencies, with the Japanese yen and Chinese yuan declining by 2.39 percent and 0.79 percent, respectively.
The currency's depreciation was triggered by the Middle East conflict, which has driven up global oil prices due to supply disruptions, thereby reinforcing the dollar's strength amid a risk-off sentiment. Brent Crude, the global benchmark, surged to a multi-year high of over $106 a barrel on Sunday (U.S. time) as the Strait of Hormuz has effectively been closed since the crisis began. This strategic waterway is crucial as roughly 20 percent of the world's oil and gas supply transits through it.
Higher oil prices exert significant pressure on the won, as they escalate South Korea's demand for dollars to pay for crude imports. South Korea relies on imports for about 98 percent of its fossil fuels and sources approximately 70 percent of its crude oil from the Middle East, based on industry and government data.
Economist Park Hyung-joong from Woori Bank noted, "The surge in global oil prices has heightened inflation concerns, boosting demand for safe-haven assets and strengthening the dollar." He further added, "The Iran crisis is increasingly likely to last longer than expected, and the won may continue to fluctuate around the 1,500 won range if such structural pressures persist."
Foreign capital outflows from the local stock market have also impacted the currency. Offshore investors have sold approximately 13 trillion won (US$8.69 billion) worth of Korean stocks in the first half of this month, following a record monthly net sale of 21 trillion won in February, according to data from the Bank of Korea (BOK).
A declining won has intensified inflationary pressures and could impede economic growth momentum, raising fears of stagflation, where high inflation coincides with stagnant economic growth. A BOK analysis estimates that a 10 percent annual rise in global oil prices could elevate consumer inflation by up to 0.2 percentage points. The central bank forecasts a 2 percent economic growth in 2026 while projecting a 2.1 percent expansion in consumer inflation, assuming Brent crude averages around $64 per barrel this year.
While a weaker won might enhance price competitiveness for exporters in global markets, it also increases costs for companies and squeezes profit margins due to the country's heavy reliance on imported energy, raw materials, and industrial components. Economist Lee Min-hyuk from KB Kookmin Bank remarked, "Rising oil prices would dampen global trade and disrupt logistics, posing challenges for exporters. They could shrink the country's current account surplus and add further downward pressure on the won."
Steep inflation could also undermine consumer sentiment, raising concerns that expectations for a recovery in domestic demand and investment could diminish. Economist Baek Seok-hyun from Shinhan Bank stated, "Even if the conflict winds down, it would be difficult to return to the conditions seen in February soon, as energy supply chains are unlikely to normalize rapidly."
The government has been vigorously working to stabilize the foreign exchange market and mitigate the crisis's impact on the economy and people's livelihoods. On Saturday, Finance Minister Koo Yun-cheol and his Japanese counterpart, Satsuki Katayama, expressed "serious concerns" over sharp currency declines in a joint document adopted after their ministerial meeting in Tokyo, agreeing to coordinate responses to alleviate market volatility. Koo also suggested a possible verbal intervention to curb the won's sharp decline if necessary.
The BOK has indicated that dollar liquidity remains ample and that the country's external borrowing spreads and credit default swap (CDS) premiums are stable, pledging continued enhanced market monitoring and readiness to implement stabilization measures promptly if required. The government and the ruling Democratic Party (DP) have agreed to draft and submit this year's first supplementary budget bill to the National Assembly by the end of March, following President Lee Jae Myung's directive for prompt preparations for an extra budget to address the ongoing conflict's repercussions.
To curb inflation, the government recently introduced a temporary price cap on fuel supplied by refiners to gas stations.