The last report under Governor Rhee Chang-yong: "Why the exchange rate jumps even with a surplus"

The term of Bank of Korea (BOK) Governor Rhee Chang-yong ends on the 20th, and under his leadership the BOK has released a final report explaining the structural factors behind the rise in the won–dollar exchange rate. The findings confirm that the steady expansion of overseas equity investment, which Rhee has long emphasized, has played a decisive role. As Korea has shifted to a net foreign asset country, the influence of domestic residents on the exchange rate has grown, and within that, the private sector has become the main driver of investment. As a result, the traditional rule of thumb that "a current account surplus means a stronger currency" has broken down.
■Overseas asset investment now drives the exchange rateIn a report released on the 17th titled "The impact of structural changes in Korea’s external sector on the exchange rate," the Bank of Korea noted that since Korea shifted from a net external debtor to a net foreign asset country in the third quarter of 2014, the real exchange rate has been on an upward trend even though the current account surplus has remained stable.
The BOK’s analysis shows that since 2015, "positive financial shocks"—episodes in which capital outflows push the exchange rate higher—have become more important. Comparing the period before 2014 with the period from 2015 to the third quarter of 2025, the frequency of such positive shocks rose from 21.4% to 34.9%, an increase of 13.5 percentage points. By contrast, "negative financial shocks," defined as capital inflows that lead to a lower exchange rate, fell from 35.7% to 18.6%, a drop of 17.1 percentage points.
In particular, when financial shocks occur, a strong positive correlation emerges between the current account and the exchange rate. During positive financial shocks, a 1 percentage point increase in the current account balance as a share of gross domestic product (GDP) is associated with a 0.65 percentage point rise in the real won–dollar exchange rate.
Korea’s currency also reacts more sensitively than those of other advanced economies. Korea’s regression coefficient was 0.65, while the figures for the United States of America (US) and Japan were about 0.07 and 0.38, respectively. In other words, for the same financial shock, Korea’s currency tends to depreciate more.
The BOK attributed this pattern to the growing influence of domestic residents on the exchange rate and the expansion of net capital outflows. It judged that this tendency has become even more pronounced since the second quarter of 2023. In fact, despite recording a record current account surplus of 123 billion dollars last year, the exchange rate climbed to 1,480 won per dollar by year-end.
■External assets: the private sector now takes the leadAnother key factor behind the new pattern—where the exchange rate can rise even when the current account is in surplus—is the shift in who holds external assets, from the public sector to the private sector. As of last year, foreign exchange reserves held by the central bank accounted for only 14.9% of Korea’s total external assets, while portfolio investment made up 44.1% (34.0% in equities and 10.1% in bonds). Between 2020 and 2024, households accounted for 266 trillion won, or 69.4%, of Korea’s total net savings of 383 trillion won.
Kim Jihyun, head of the International Finance Research Team in the BOK’s International Department, explained, "As external asset accumulation has increasingly been led by the private sector, capital outflows through the financial account have had a greater impact on the real exchange rate and the current account." She added, "As residents’ preference for overseas assets rises, the exchange rate can move higher, and the resulting relative price adjustments and reduced domestic absorption can in turn generate a current account surplus."
In fact, this composition of external assets is closer to that of advanced economies. Securities investments account for 38.7% of external assets in advanced economies, compared with 15.6% in emerging economies. Korea’s share is 5.4 percentage points higher than the advanced-economy average. As of 2024, 67.7% of Korea’s overseas equity investment was in the US, about 2.3 times the advanced-economy average of 29.5%.
Kim noted, "Compared with the past, non-residents now play a relatively smaller role in foreign exchange market supply and demand, while capital outflows and inflows by the domestic private sector have become more important." She continued, "Financial shocks such as shifts in preferences toward overseas assets trigger capital outflows and depreciation of the domestic currency, and this can widen the current account surplus." She pointed out that this pattern was especially evident during the Global Financial Crisis (GFC) in 2008 and the surge in overseas securities investment in 2025.
She also said, "Since 2000, more than 80% of the fluctuations in the real won–dollar exchange rate can be attributed to financial shocks," adding, "Most of these financial shocks stem not from changes in saving behavior, but from shifts in demand for dollar assets."


taeil0808@fnnews.com Kim Tae-il Reporter