South Korea’s won has spent the past several years on a steady downward drift, losing ground not only against the US dollar, but also against the currencies of many of its major trading partners.

Each time the exchange rate approaches levels that unsettle policymakers, government officials and the Bank of Korea repeat familiar assurances: that they are watching markets closely, that fundamentals remain strong, and that excessive volatility will be addressed.

Occasionally, authorities step in to smooth fluctuations. Yet despite these efforts, the currency continues to weaken, largely indifferent to official statements. This is neither an ordinary swing in market sentiment nor does it resemble the temporary bouts of weakness that Korea has weathered in past global downturns.

The persistent softness of the won today reflects a convergence of deeper factors, such as widening interest-rate differentials with the United States, sustained capital outflows from Korean institutions and households, a slowing domestic economy, episodes of political volatility and a more cautious stance among global investors toward Korea’s future.

Each force is influential on its own; together, they have reshaped the balance of expectations that underpin the currency. The most visible of these forces is the growing divergence in monetary policy.

The Bank of Korea, once able to roughly track the US Federal Reserve’s moves, now finds itself constrained by domestic realities — sluggish consumption, heavy household debt and waning momentum in potential growth. Raising rates risks choking an already fragile economy.

But leaving them unchanged widens the yield gap with the US, where interest rates remain near historic highs. Global investors, naturally, favor higher-yielding dollar assets. Korean institutions do the same, expanding their overseas portfolios in search of better returns. Retail investors, now well accustomed to global platforms, follow suit.

This outward flow of capital creates a persistent demand for dollars and, in turn, a structural depreciation bias for the won. Even when the Federal Reserve eventually begins easing, Korea may find limited relief; its potential growth rate has fallen below America’s, eroding the two key advantages — interest and growth premiums — that once supported Korean assets.

Credibility discount

More consequential for the long run, however, is Korea’s gradual evolution into a capital-exporting economy. Large conglomerates maintain sizable foreign-currency holdings overseas, pension funds and insurers diversify aggressively into global markets and households routinely invest abroad, treating foreign securities as a standard component of their savings strategy.

This is not a temporary response to currency volatility, but reflects a deeper perception that domestic financial markets remain narrow, heavily concentrated and less appealing than the broader opportunities available elsewhere.

When a country’s own savers seek returns abroad faster than foreign investors bring capital in, the currency will inevitably weaken. The won today is shaped not only by foreign opinion, but also by the portfolio decisions of Korean households and institutions.

These financial patterns mirror broader concerns about Korea’s long-term growth prospects. While the nation remains a global leader in semiconductors, batteries and automobiles, signs of fatigue are evident beyond these flagship sectors.

Productivity growth has stalled. Consumption remains sluggish. And population aging — among the fastest in the world — is constraining labor supply and steadily reducing potential output. Korea’s shrinking working-age population is not simply a demographic challenge; it is a structural constraint that will weigh on growth for decades.

Young Koreans face stagnant incomes, soaring housing costs and limited upward mobility. Small and medium-sized firms struggle with regulatory complexity and persistent uncertainty. Confidence, both corporate and household, remains subdued. This combination depresses investment and consumption, reinforcing the very slowdown that worries investors.

Markets pay close attention to these signals. Beyond headline gross domestic product or the performance of a handful of export champions, long-term investors look for durability — signs that economic fundamentals are strengthening rather than eroding. When those fundamentals appear to be slipping, investors demand a risk premium.

Political dynamics have compounded these concerns. In recent years, Korean politics has been marked by sharp polarization and periodic standoffs that unsettle markets. In an economy as open and globally interconnected as Korea’s, political stability is not an abstract ideal — it is a source of currency stability.

Markets do not react to ideology; they react to predictability, transparency and institutional reliability. When these characteristics come into question, rebuilding credibility takes time. These internal factors help explain why the won often fails to recover even during periods when the US dollar weakens. A currency that rises less during global risk-on periods and falls more during risk-off episodes is typically burdened by domestic vulnerabilities.

In Korea’s case, it suggests that the won carries a credibility discount that cannot be erased with routine policy measures. Policymakers now face a tighter set of constraints than in earlier periods of currency stress. Raising interest rates to support the won risks suffocating domestic demand. Cutting rates accelerates depreciation. Intervening in foreign exchange markets offers only temporary relief while depleting reserves that must be preserved for more severe crises.

And the structural forces behind capital outflows — demographic shifts, limited financial diversification and a growing appetite for global assets — lie beyond the reach of day-to-day monetary tools.

Korea, therefore, needs a broader strategic response.

Reviving productivity across the entire economy, not just in export-heavy manufacturing, is essential. Strengthening domestic demand must be a priority so the nation is not perpetually reliant on external cycles. Deepening and diversifying financial markets would give Korean savers stronger reasons to keep their money at home.

Just as important is reinforcing institutional and political credibility. Markets reward consistency and predictability — qualities that determine whether Korea is viewed as a safe long-term destination for capital. Investors need assurance that economic policy will remain disciplined and stable across political cycles.

Finally, Korea must articulate a clearer, forward-looking growth narrative that addresses demographic constraints, technological rivalry and shifting global trade patterns. Without such a vision, the won’s future recoveries are likely to be shallow and short-lived.

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.

khnews@heraldcorp.com