Published on: 2025-10-03
Updated on: 2026-03-13
In early 2026, the South Korean won (KRW) remains historically weak against the U.S. dollar compared with pre-2022 levels. But the current story is more nuanced than a simple export slump or a one-off market shock.
In this article, we explain the main forces keeping the won under pressure in 2026, including rate differentials, external dollar demand, political and trade uncertainty, and persistent capital outflows.
Before diving into causes, let's anchor on facts:
On February 26, 2026, the Bank of Korea left its Base Rate unchanged at 2.50%, showing that policymakers are still balancing growth support against exchange-rate and financial-stability risks.
The IMF projected Korea’s growth at 0.9% for 2025 and 1.8% for 2026, which points to improvement, but not a full return to strong growth.
Korea still recorded a $18.70 billion current-account surplus in December 2025 and a $13.26 billion surplus in January 2026.
That means won weakness is no longer best explained as a simple trade-deficit story; capital flows and dollar demand still matter.
Let's explore why.
A currency is measured against its peers. And when the U.S. dollar rallies, many emerging or export-oriented currencies suffer.
The strong-dollar backdrop and U.S. yield advantage kept pressure on KRW through 2025, and that pressure has not disappeared in early 2026.
South Korea remains highly sensitive to changes in global trade, U.S. Treasury yields, and cross-border capital flows.
The Bank of Korea’s published stabilization data show repeated net U.S. dollar sales in 2025, including $797 million in Q2 and $1.745 billion in Q3, which highlights how persistent the pressure on the won became.
Thus, a strong USD plays a starring role in KRW's depreciation.
South Korea is a highly export-dependent economy. If exports falter or face headwinds, the currency often gets punished.
Export weakness was a real issue in 2025, but the 2026 won story is broader than exports alone.
Even with large current-account surpluses, the won can stay weak when financial outflows and offshore demand for dollar assets remain strong.
Trade friction and tariff uncertainty from the U.S. still raise risk premia on Korean assets and the currency.
The won is often labelled "one of the weakest global currencies", given how export dependency magnifies vulnerability.
When your export engine suffers, the currency often bears the brunt.
The strength of a currency relies not only on foreign factors but also on local fundamentals.
Domestic demand has been a weak point, and that softness has limited support for the won.
The IMF estimated Korea’s growth at 0.9% in 2025, with a rebound to 1.8% in 2026, which is better, but still modest by Korea’s historical standards.
The main point for currency markets is that Korea’s growth backdrop improved only gradually, not decisively.
A slow-growth environment tends to reduce investor enthusiasm for KRW-denominated assets.
A weak economy erodes investor confidence, making the won less attractive to hold.
Differences in interest rates can attract capital or discourage it.
As of February 26, 2026, the Bank of Korea kept the Base Rate unchanged at 2.50%, so the article should no longer describe an imminent cut as the base case.
Even with rates on hold, Korean assets can still look less attractive if U.S. yields remain higher and exchange-rate volatility stays elevated.
Lower rates help stimulate domestic activity, but they also risk capital outflows and currency weakening.
Political and structural uncertainties have also negatively impacted the won.
Political uncertainty has been a real macro factor since late 2024, not just a headline risk.
The IMF said prolonged domestic political and global trade policy uncertainties have weighed on Korean economic activity since late 2024.
Because Korea is highly exposed to trade and external demand, policy uncertainty can quickly feed into capital flows and exchange-rate sentiment.
When politics makes markets nervous, currencies often suffer.
A weakening currency often reflects capital leaving the country or a reluctance to invest domestically.
A weaker won reduces returns for foreign investors in KRW-denominated assets, which can make those assets less attractive on a currency-adjusted basis.
Korea’s current-account surplus has not translated into a stronger won because large equity outflows and other overseas investment flows have offset part of that support.
Persistent demand for foreign assets by Korean investors is now a central part of the won story, not a side issue.
When money flows out faster than it flows in, the currency feels the stress.
Certain weaknesses are ingrained due to structural or competitive elements.
Significant reliance on exports, strong rivalry from Chinese manufacturers, and grouped vulnerability in electronics, shipbuilding, etc.
High household debt, an ageing population, and demographic challenges restrain domestic growth and stability.
The dominance of large conglomerates (chaebols) can stifle innovation, diversification, and flexibility.
Structural weaknesses amplify cyclical ones, making downward pressure more persistent.
The central bank can intervene, but has limitations. For example:
The Bank of Korea has used FX stabilization operations to smooth volatility, and its published 2025 data confirm repeated intervention.
But intervention can slow disorderly moves more easily than it can reverse a longer-term market trend.
In practice, FX defence works best when it is supported by better growth, calmer risk sentiment, and more balanced capital flows.
Thus, central intervention may act as a short-term dam, but not a lasting fix.
In times of global stress, the won competes for capital with perceived safer currencies.
Risk-off episodes tend to push money toward safe-haven currencies, weakening the won by correlation.
In its February 2026 statement, the Bank of Korea said risk-off sentiment had strengthened somewhat in global financial markets, which is the kind of backdrop that usually favours the dollar over the won.
In turbulent times, the winner often becomes a victim of "flight to safety."
| Pushes won higher | Pushes won lower |
|---|---|
| Stronger semiconductor and broader export demand | Strong U.S. dollar and higher U.S. yields |
| Smaller U.S.-Korea rate gap | Persistent rate differential and FX volatility |
| Foreign portfolio inflows into Korean assets | Residents’ overseas asset purchases and broader capital outflows |
| Lower trade and geopolitical uncertainty | Tariff shocks, political uncertainty, and risk-off sentiment |
Where might the won head from here?
Consensus: The 2026 outlook is more balanced. The Bank of Korea now says growth is improving faster than expected, but exchange-rate volatility and external policy uncertainty remain important risks.
What to watch next: The U.S.-Korea rate gap, Korean residents’ overseas asset purchases, semiconductor export momentum, and any renewed tariff or geopolitical shocks.
The won is weak because several forces are pulling in the same direction: the U.S. dollar remains relatively attractive, Korea’s growth backdrop has been soft, political and trade uncertainty have weighed on sentiment, and steady outward investment has kept demand for foreign currency elevated.
When the U.S. Fed raises interest rates while the Bank of Korea holds or cuts rates, capital tends to flow into the U.S. for higher returns, pressuring the won to weaken.
Yes. South Korea relies heavily on exports (especially semiconductors, autos, and shipbuilding). A global slowdown in demand has reduced dollar inflows, making the won weaker.
Absolutely. China is South Korea's largest trading partner. When China's growth slows or its yuan weakens, the won often follows due to trade and financial linkages.
A recovery is possible, but it is more likely to be gradual than dramatic. A firmer won would probably require a narrower U.S.-Korea rate gap, continued export strength, calmer external policy conditions, and slower capital outflows into overseas assets.
In conclusion, the won’s weakness in 2026 is not a simple trade story. Korea can still run current-account surpluses and see better exports while the currency remains soft, because rate differentials, outward investment, and risk sentiment continue to support dollar demand.
A durable recovery in KRW would likely require a combination of steadier domestic growth, less exchange-rate volatility, narrower relative yield pressure, and more balanced capital flows.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
