[Yoo Choon-sik] What the weakening won may be signaling

In April 2024, when the won’s exchange rate broke through the 1,400 mark against the dollar, the leader of the Democratic Party of Korea at the time warned that a serious crisis was becoming reality and called an emergency meeting to press the government to respond. The message was unmistakable. A weakening currency was not just a market fluctuation but a warning sign for the nation.

Nearly two years on, that same political leader occupies the presidential office, only to witness the rate remain unstable. Instead of retreating, it has at times surpassed 1,500 won per dollar in offshore trading.

In an economy as open as South Korea’s, exchange rates are shaped less by presidential resolve than by global interest rates, geopolitical tensions and shifting investor sentiment.

Currencies reflect broader judgments about an economy’s fundamentals and future prospects. This is why the recent divergence between South Korea’s soaring stock market and weakening currency value deserves close attention.

Since President Lee Jae Myung took office, the Kospi has staged a spectacular rally, more than doubling in less than nine months to reach a record closing high by late February. Even after falling 13 percent since then amid the war between the US, Israel and Iran, it still recorded the strongest gain among major global indices during the period since June last year.

Beneath the impressive numbers lies a more troubling reality. Foreign investors have not significantly increased their holdings of South Korean equities during this period and even began withdrawing substantial funds before tensions in the Middle East escalated. This added further pressure on the won.

Stock prices can be lifted by domestic liquidity and investor sentiment. Exchange rates are more exacting because they reflect the collective judgment of global investors on risk and return. They serve as a real-time barometer of confidence among global financial experts in a country’s economic direction.

Of course, there are structural factors that have long weighed on the won. South Korea’s growing pension funds, institutional investors and corporations have steadily increased their overseas investments, particularly in the United States. This has created sustained demand for foreign currency. The trend predates the current administration.

However, structural factors alone seem insufficient when the won weakens sharply even as equities surge. This raises the question of whether deeper concerns are shaping foreign investors’ decisions.

One possible explanation is that foreign investors are reassessing not only short-term growth prospects, but also the long-term direction of economic policy.

Housing policy offers a revealing example in this regard. The Lee administration has moved aggressively to restrain or even push down home prices in the capital and surrounding areas. It argues that loans for home purchases and jeonse leases have driven household debt to levels widely seen as a structural risk.

Few dispute the seriousness of South Korea’s household debt burden. Yet criticism has focused less on the goal than on the method. Many experts call the measures abrupt and heavy-handed, arguing they encroach on core market principles such as private property rights and freedom of residence.

Whether such claims are exaggerated is secondary. What matters more is the perception among segments of the business community that policy is being driven more by political urgency than by inclusive deliberation.

Policy speed vs. institutional confidence

That perception has been reinforced in the legislature, where the ruling party holds an overwhelming majority in the National Assembly. With the main opposition weakened by electoral defeat and the impeachment of the former president, contentious bills can move through parliament with relatively little resistance.

Recent initiatives have significantly reshaped parts of the judicial framework and regulatory oversight. This has prompted concerns about the independence of institutions such as the Fair Trade Commission. While institutional reform may sometimes require speed, changes pushed through too quickly can weaken confidence in the policymaking process.

For instance, the revision of the Trade Union and Labor Relations Adjustment Act, widely known as the Yellow Envelope Act, highlights this tension. It allows indirectly employed workers, including subcontracted and platform workers, to designate primary contractors as bargaining counterparts. It also expands the scope of lawful labor disputes and limits damage claims against unions.

Supporters say the changes reflect evolving employment structures and strengthen protections for vulnerable workers. Critics warn they could intensify labor disputes and increase uncertainty for employers. This concern was reinforced when primary contractors were quickly inundated with bargaining requests soon after the law took effect last week.

Foreign businesses operating in South Korea have expressed unease about the speed and manner of the legislative process. Calls for a more gradual transition were overridden by the parliamentary majority. Global investors tend to value the stability and predictability of legal systems as much as taxes or wages.

This approach signals uncertainty to long-term investors.

Capital tends to remain where it trusts the framework. If the rulemaking process appears opaque or dismissive of dissenting views, confidence weakens.

The recent depreciation of the won cannot be explained solely by domestic legislative developments. Global interest rate gaps, commodity prices and geopolitical tensions also play powerful roles.

Markets are shaped by narratives, and investors look for consistency between economic outcomes and policy direction. When stock indices rise sharply even as the currency weakens and foreign capital flows out, the disconnect suggests global investors may be forming a more cautious view of the country than domestic market charts imply.

Two years ago, a party leader warned that a weakening won signaled national peril. As president, he now faces a more complex challenge of sustaining stock market momentum while strengthening the institutional credibility that underpins long-term economic stability.

Confidence builds gradually through transparent procedures, respect for checks and balances and meaningful engagement with diverse views.

Policymakers would do well to examine whether hesitancy among foreign investors reflects deeper questions about governance and the durability of economic rules.

Yoo Choon-sik

Yoo Choon-sik worked for nearly 30 years at Reuters, including as chief Korea economics correspondent, and briefly as a business strategy consultant. The views expressed here are the writer’s own. — Ed.