On Jan. 22, the KOSPI exceeded the 5,000 mark for the first time. This surge was driven by the boom in the semiconductor industry, particularly among companies such as Samsung Electronics and SK Hynix. Thanks to the industry’s strong exports, South Korea’s current account surplus is also at a record high. According to conventional economic theory, this should result in a significant influx of dollars, causing the value of the KRW to strengthen. However, the KRW/USD exchange rate remains stuck in the mid-1,400 range.
In the Korean economy, the KRW/USD exchange rate is more than just a number; it has historically been a barometer for economic crises. During the 1997 IMF crisis and the 2008 global financial crisis, the exchange rate skyrocketed. These events left a deep trauma on the Koreans, and the rising exchange rate trend since the second half of 2025 has sparked similar fears. However, the current situation is different from past crises. The global economy is relatively stable, and domestic corporate earnings are improving due to the AI boom. Despite this, the KRW/USD exchange rate remains unstable due to a complex mix of factors.
Although the domestic stock market is strengthening, including the recent surge in the KOSPI, capital continues to flow out of Korea. Investors have an overwhelming belief in the growth of U.S. technology, which has boosted demand for American stocks and the dollar. Since most global big tech companies leading the AI era are concentrated in the U.S., international markets offer more opportunities than the domestic market. Individual investors, major companies, and even the National Pension Service are aggressively investing abroad, reinforcing the belief that the dollar will remain strong. This expectation encourages people to hold onto their dollars rather than sell them, further pushing up the exchange rate.
Compared to other developed countries, South Korean households still hold a low percentage of foreign currency assets, implying the outward flow of capital will not stop for a while. Furthermore, wealthy individuals are even giving up their Korean citizenship to avoid heavy inheritance and gift taxes. According to Henley & Partners, South Korea ranked fourth in the world for the net outflow of millionaires, with an estimated 2,400 wealthy individuals leaving in 2025. This outflow leads to the selling of assets based on KRW and the purchase of foreign assets, driving up the exchange rate.
Structural changes in the Korean economy are also weakening the KRW. Major companies like Samsung, SK, and Hyundai have pledged large investments in the U.S., over 100 trillion KRW, with annual investment up to 20 billion USD planned for the next decade. This puts significant pressure on the foreign exchange market. Furthermore, the dollars earned from exports are not returning to Korea but are being reinvested locally to build factories in the U.S. Even when trade is in surplus, the actual supply of dollars in the domestic market remains limited.
The heavy dependence on semiconductors in Korea’s export structure is another problem. Over 80% of the trade surplus comes from the semiconductor sector, while other industries are in the red. Traditional key industries like petrochemicals and steel are struggling structurally. There are concerns that if the semiconductor boom fades, the exchange rate could rise higher.
In the long term, the fundamental risks to the exchange rate are national finances and demographic changes. As the national debt-to-GDP ratio rises, the lower bound of the exchange rate rises with it. When the ratio was in the 30% range, the lower bound was around 1,050 KRW; however, once it exceeded 50%, the exchange rate shifted to 1,300 KRW. It could lead to a sovereign credit rating downgrade and capital outflows by foreign investors if the ratio exceeds the 60%—the limit recommended by the IMF—since Korea does not hold a reserve currency. Additionally, an aging population and low birth rate are increasing the fiscal burden. With a shrinking working population and rising debt, a decline in the value of the currency seems inevitable.
Experts point out that expecting the exchange rate to return to past levels is unrealistic. They suggest that instead of trying to artificially defend the exchange rate, the government should focus on strengthening industrial competitiveness. It is important to improve the KRW’s fundamental strength and credibility by diversifying export products beyond semiconductors and boosting productivity across all industries.
