[Editorial] In the Era of a New Normal for Exchange Rates, Structural Reforms Are Urgently Needed, Not Short-Term Intervention

The US Dollar–South Korean Won exchange rate is surging, now approaching the 1,500-won mark. When the rate spiked last April due to concerns over US-China trade tensions, it was considered a temporary phenomenon. However, after some minor fluctuations, the current trend is clearly upward, raising even greater concerns.
Companies preparing business plans for next year are gripped by anxiety. If they fail to predict exchange rate movements, not only does the value of their hard-earned money decline, but unpredictable raw material price fluctuations can undermine their entire business plans. More seriously, last month, the real value of the South Korean won plummeted to its lowest level in 16 years and 2 months since the global financial crisis. South Korea's Real Effective Exchange Rate Index (REER) stands at 89.09, not much higher than the 1998 level (86.63) when the country received a bailout from the International Monetary Fund (IMF). A low REER indicates that the purchasing power of the South Korean won in international trade has significantly diminished.
Although it is belated, it is fortunate that Kim Yong-beom, Policy Chief at the Presidential Office, has highlighted the exchange rate issue and called for countermeasures. The problem, however, is that focusing solely on stabilizing the foreign exchange market, as was done in the past, will not resolve the current surge in exchange rates. The environment surrounding the foreign exchange market has changed dramatically. It is no exaggeration to say that we have entered a new normal era where short-term government intervention is no longer effective in managing exchange rates. What is needed now is not a short-term fix, but urgent medium- to long-term structural reforms.
Against this backdrop, it is time to view the surge in overseas stock investments from a structural perspective. The recent spike in exchange rates is often attributed to the craze for US stock investments among domestic investors. The concentrated demand for dollars is fueling the weakness of the South Korean won. While individual investment freedom cannot be restricted, the most ideal solution is to create an attractive investment environment that draws capital into the domestic stock market. However, given the realities of our economic structure, appropriate management measures are inevitable when capital outflows threaten macroeconomic stability. The Korea-US Investment Agreement has also led export companies to delay converting their earnings, further driving up the exchange rate. Companies required to make large-scale investments in the US are holding on to their dollar earnings. As a follow-up to the Korea-US Investment Agreement, the government must quickly devise measures to manage foreign exchange supply and demand.
It is also important to recognize that the outdated notion that a weaker South Korean won boosts export competitiveness no longer holds true. Unlike during past currency or financial crises, global supply chains are now being restructured, and dependence on imported intermediate goods has increased. The disadvantages of a weaker won—such as rising import prices and greater burdens on companies—now outweigh any benefits from improved export price competitiveness.
Ultimately, it is ordinary citizens who bear the brunt of high exchange rates. Rising import prices drive up the cost of living, and expenses for overseas travel and studying abroad also increase. When companies face higher costs for importing raw materials, they inevitably raise product prices, which is passed on to consumers. This is why the government must make every effort to stabilize exchange rates.
However, government intervention in the market by deploying foreign exchange reserves during sharp exchange rate spikes is merely a temporary measure. The policy now required is not exchange rate defense, but structural improvement of the currency system. The government must address the issue through structural approaches such as easing the concentration of overseas investments, encouraging exporters to convert their earnings, and expanding foreign investment inflows. We urge the government to swiftly establish a sustainable exchange rate stabilization strategy.