The central bank of South Korea intervened in the FX market by selling $800 million US dollars (or other currencies) and buying Korean won (KRW) to support the value of the won. This is typically done to suppress volatility or alleviate the depreciation of the local currency.

We accept the facts that US Dollar is the most common currency for South Korea’s trade and financial transactions.

The depreciation problem is almost always the Won-Dollar exchange rate (USD/KRW). That is not the only matter The Bank of Korea (BOK) has significantly increased its foreign exchange intervention in recent years by selling US dollars and buying Korean won with the aim of stabilizing its economy.

The Korean won (KRW) has experienced extreme downward pressure (depreciation) against the US dollar (USD) in the last few years due to a complex array of global and domestic economic forces.

Key Structural Factors Driving Won Depreciation

The largest contributor to the South Korean economy is Exports, specifically the Global Semiconductor Market. The economy of South Korea is highly export-based, with foreign trade in goods and services at times amounting to over 70% of its GDP. This renders it highly sensitive to global demand and supply chain variations.

South Korea has one of the highest household debt-to-GDP ratios among advanced economies. High interest rates significantly increase debt-servicing costs for households, which in turn severely limits private consumption and investment.

While not the highest absolutely, the proportion in South Korea is very high amongst the big economies, often around 90%–94% (and well over 100% historically). It is cited as the second-highest of the major developed nations, following Canada. This high proportion of debt is a main flaw, as discussed previously, because high interest rates have incredibly large impacts on consumer spending.

Global Monetary Policy and Interest Rate Differential

The primary short-term reason for KRW depreciation pressure against the USD is often the monetary policy of the US Federal Reserve (the Fed).

When the Fed maintains high interest rates to combat inflation, it creates a high interest rate spread compared to the rates of the Bank of Korea (BOK). The spread prompts international investors to move funds out of risky assets and currencies (like the KRW) and invest them in higher-yielding dollar-denominated “safe-haven” assets, for instance, US Treasury securities.

This ongoing capital outflow increases the spot demand for USD and decreases demand for KRW simultaneously, exerting relentless downward pressure on the USD/KRW exchange rate and often forcing the BOK to intervene.

Geopolitical Risk and the KRW as a ‘Risk-Sensitive’ Currency

The Korean Won is highly sensitive to global risk appetite, often being characterized as a “risk-sensitive” or “cyclical” currency.

Under periods of heightened global uncertainty—e.g., great geopolitical tensions, commodity price shocks, or fears of a global economic recession—investors promptly run from emerging market assets. They all shift their capital en masse to the ultimate safe haven: the US Dollar. This flight to safety is termed a “risk-off” trade.

The subsequent large, abrupt capital outflows are often what trigger the BOK’s need to intervene to drain the subsequent abnormal volatility because the official goal of FX intervention in South Korea’s floating exchange rate system is to stabilize untoward market movements.

Examination of the Intervention Strategy

But isn’t there a worldwide dedolarization trend?

South Korea and other nations are actively “dedolarizing.” South Korea and Indonesia, for instance, have come to an agreement to promote the use of the Korean Won and the Indonesian Rupiah for the trade between each other in order to restrict reliance on the USD as a go-between currency.

Selling US dollars and buying Korean won (KRW) in order to stabilize the won’s value is a possibility but we are absolutely certain that America is the biggest consumer of South Korean goods compared to Europe. In this case, a country like South Korea would prefer selling US Dollars instead of Euros—is logical and founded on the facts of international finance.

Bank of Korea consistently has an enormous, constant flow of USD from its core customers (the US and others like ASEAN nations that also utilize USD).

When assessing the central bank’s desire to reduce its overall foreign currency exposure (in order to manage domestic money supply or stabilize the Won), selling the currency is the simplest and most efficient, it yields the highest amount of and the one that is the source of the largest, most common net inflow—almost invariably the US Dollar.

The debt is an unwanted, unavoidable drag on South Korean economic and diplomatic freedom but not a brilliant strategic subterfuge. Its “true intention” is likely to reduce the debt to a tolerable level, as evidenced by continuing, tightening financial regulation in this case.