South Korea is caught up in a battle to defend its exchange rate: Retail investors are pouring billions of dollars overseas, and the National Pension Fund is forced to sell US dollars.

Notice that the South Korean authorities are taking increasingly aggressive actions in an attempt to prevent the Korean won from falling to new lows not seen since the depths of the global financial crisis in early 2009. To support the Korean won, officials have pressured the country's pension funds to sell U.S. dollars and urged large conglomerates to convert more U.S. dollar earnings back into the local currency. So far, these measures have not been able to stem the decline in the exchange rate. The currency weakness has both positive and negative aspects for South Korea, as it can boost export competitiveness, with exports being the main driver of this $1.9 trillion economy. However, it can also lead to higher prices for energy and other key imported goods, disrupt business investment, and suppress consumer demand. What is weakening the Korean won? The government has stated that one of the reasons is the sharp increase in overseas investments by local residents. According to data from the Korea Securities Depository, as of December 19, retail investors in Korea have purchased a record $43 billion (about 63.7 trillion won) worth of U.S. assets this year, with purchases of U.S. stocks approximately three times the level in 2024. In light of the potential negative public opinion that blaming the public for the currency depreciation could provoke, government officials have also mentioned South Korea's slower economic growth and lower interest rates compared to the United States. The central bank governor, Lee Chang-yeong, pointed out the long-standing issue of the "Korea discount" - the undervaluation of the country's top conglomerates and the overall stock market due to corporate governance issues. Since September, broader macroeconomic factors have indeed not been favorable for the Korean won: fading expectations of Fed rate cuts, Korea agreeing to establish a $350 billion investment fund in its tariff talks with the United States, and the continued weakening of the Japanese yen under the new conservative government in neighboring Japan. However, large-scale overseas investments by Korean residents continue. As the year-end approaches, foreign investors, who have been steadily buying Korean stocks, have turned to net sellers, further exacerbating the pressure on the Korean won. Why are Koreans continually sending funds overseas? The lackluster returns on Korean stocks over the years have convinced many savers that the domestic stock market cannot provide reliable long-term returns. As a result, they have shifted their funds overseas. Older Koreans are particularly wary of relying too heavily on domestic investments, as they still vividly remember the 1997 Asian financial crisis that ravaged the nation's wealth. High housing prices in Korea, especially in the capital Seoul, are another factor. Many young homebuyers now feel priced out of the housing market and are no longer saving for a down payment on property but instead diverting their savings into high-risk overseas investments and cryptocurrencies as a means to maintain hopes of upward mobility. This trend has a somewhat self-fulfilling aspect: retail investors tell the media that they are transferring assets overseas to protect themselves from the depreciation of the Korean won. Technological factors also play a role. Since the pandemic, the barriers for individuals to access foreign investment platforms and purchase related products have significantly decreased. What are the pros and cons of the weak Korean won? For the export-driven South Korean economy, a depreciation of the local currency has its benefits. Companies like Samsung Electronics have repeatedly set profit records thanks to strong returns in the U.S. and favorable exchange rates. However, a weak Korean won can also lead to rising import prices, and as South Korea relies heavily on imports for most of its energy, this poses a risk. The central bank has warned that a sustained weak Korean won could push up inflation beyond target levels. The Korean won depreciated by half during the 1997 crisis and faced selling pressures again during the 2008 global financial crisis. Since then, South Korean authorities have remained vigilant against extreme exchange rate fluctuations that could be triggered by global capital flows. The current difficulties of the Korean won could complicate South Korea's efforts to implement all-day foreign exchange market opening and to strive for inclusion in the MSCI developed markets index. How is the South Korean government attempting to boost the Korean won? Government officials have issued verbal warnings in recent weeks against what they call "one-sided market fluctuations." However, these warnings have not prevented the exchange rate from approaching lows not seen since 2009. Therefore, authorities have intensified efforts, seeking cooperation from major domestic participants in the foreign exchange market. The National Pension Service (NPS), which holds around $542 billion in foreign assets as of the end of September, has extended its foreign exchange forward contracts with Korean banks and announced it will adopt a more flexible currency hedging strategy. According to sources, a senior government official has convened the heads of the seven major conglomerates in Korea, including Samsung Electronics and SK Hynix, to request their cooperation in order to avoid any negative perception among the public that these powerful companies are benefiting from currency fluctuations during a highly sensitive market period. The government has also relaxed rules for maintaining stability in the foreign exchange market to ensure dollar liquidity. Financial regulators are concerned about excessive competition among companies providing overseas brokerage services, prompting brokers to cease new marketing activities related to foreign stock trading. Authorities continue with "smoothing operations" to counteract the one-sided movement of the currency but have not engaged in large-scale direct interventions that could deplete foreign exchange reserves. A central bank official told the media that the foreign exchange supervisory authority does not set specific exchange rate targets but will intervene when price fluctuations become excessively volatile. Why have the measures not been effective? Because this round of Korean won weakness is being driven by the continued overseas investments by Korean residents, this trend is not easily reversed. Authorities face a balancing act as they attempt to support the exchange rate through pressuring domestic institutions and adjusting their currency strategies. If the NPS does significantly increase its hedging, the Korean won's rebound speed may be faster than current market expectations, which in itself could bring a series of new risks.