- The Bank of Korea says the won is weakening because dollars are abundant in FX swaps but scarce in spot selling, creating a “plenty but not for sale” imbalance.
- A near-zero dollar premium and relatively cheap dollar funding encourage actors to lend dollars via swaps rather than convert them to won in the spot market.
- Depreciation expectations and outflows amplify the imbalance, risking higher volatility and inflation via pricier imports.
- BOK argues this is not a dollar crisis because swap funding remains accessible and reserves and external payment capacity are solid.
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The won’s recent depreciation, nearing KRW1,500 per US dollar in late 2025 and early 2026, is being driven not so much by an actual shortage of dollars but by structural imbalances between FX‐swap liquidity and spot‐market supply. FX swaps—contracts borrowing dollars in exchange for won collateral—are flush with supply. The dollar premium over the Korea–US interest rate differential has fallen precipitously, indicating weak scarcity in the swap funding market. Meanwhile, exporters and foreign investors are holding onto dollars instead of converting them to won, and foreign‐bond investment has surged, adding more dollars to the funding markets.
Spot markets, conversely, have scant dollar sellers. The BOK governor, Rhee Chang-yong, points out that many actors expect the exchange rate to continue rising, so they prefer to lend dollars (via swaps) rather than sell them outright. The psychology of expecting depreciation thus is contributing to a self‐reinforcing cycle: fewer spot market sales → weaker won → more expectations of weakening → fewer sales, etc.
Other contributing pressures include interest rate differentials (with Korea’s base rate around 2.5% and U.S. rates significantly higher), elevated foreign investment outflows in certain asset classes (equities especially), and a larger current account surplus that instead leads to holding or trading dollars rather than converting to won. Inflation and inequality are increasingly being affected due to higher import costs.
Crucially, despite growing public concern and macro risks, the BOK disputes that a crisis is imminent. Key reasons: U.S. dollar funding via swaps remains cheap and widely available, Korea’s foreign currency reserves and external payments capacity are strong, and typical crisis markers (sovereign risk, bank solvency) are not present.
Strategically, risks reside in expectations. If sentiment turns negative enough, capital flight and speculative pressures could trigger a sharp depreciation. The BOK will face tradeoffs: tightening policy or raising rates to stabilize the won could worsen domestic credit and consumption. But failing to counter expectations risks more volatile FX conditions, higher inflation, and widened inequality.
Supporting Notes
- The interest rate for borrowing won in Korea (three-month basis) is approximately 2.4%, while borrowing dollars costs about 3.6%, implying a base Korea-US differential of ~1.2% extra cost in dollar borrowing.
- The “dollar premium” over this base differential fell from ~0.022 percentage points between late June 2025 to end-of-year, to about 0.004 percentage points by Dec. 15, 2025—nearing zero, suggesting swaps are abundant.
- Foreign investment in Korean bonds rose 2.7× year-on-year in 2024, with many inflows arranged through FX swaps.
- Korea posted a current account surplus of about US$101.8 billion from January to November last year, yet residents’ securities investment outflows reached US$129.4 billion—meaning net capital outflow contributed upward pressure on FX rates.
- The won reached about 1,481.9 per dollar on one day in December 2025—the weakest in eight months—even as BOK emphasized that dollar funding remains easy and FX reserves are strong.
- BOK’s long‐term analysis shows almost no statistical correlation (≈0.10%) since 2005 between differences in money supply growth (Korea vs US) and won-dollar rate increase, calling into question claims that excess won liquidity is a primary driver.