The foreign exchange market is experiencing unusual turbulence. The won-dollar exchange rate surged to 1,400 won during trading, marking the largest swing in two months. The rapid weakening of the won was driven by a combination of a strong U.S. dollar, foreign capital outflows, and disappointment over South Korea’s tax reform proposals.

According to the Seoul Foreign Exchange Market on August 3, the won-dollar exchange rate surpassed 1,400 won on the morning of August 1, reaching 1,407.4 won by 5:43 p.m. This was 20.4 won higher than the previous week’s closing rate. It was the first time since May 19 that the exchange rate exceeded 1,400 won during trading.

The sharp rise in the exchange rate is attributed to multiple overlapping factors. The dollar index, which measures the value of the U.S. dollar against six major currencies, climbed from the 97 range last week to above 100 this week. Market anxiety has spread as trade negotiations between the U.S. and major countries continue, compounded by the Federal Reserve’s (Fed) hawkish (favoring monetary tightening) stance. At a press conference following the Federal Open Market Committee (FOMC) meeting on July 30, Fed Chairman Jerome Powell emphasized, “I and most committee members do not believe that restrictive monetary policy is inappropriately holding back the economy.” He signaled that the current interest rates are not excessively high to hinder economic growth. Last month’s June Personal Consumption Expenditures (PCE) price index and weekly unemployment claims both exceeded market expectations, bolstering forecasts that the Fed’s interest rate cuts may be delayed further.

Disappointing sell-offs triggered by South Korea’s tax reform proposals are also cited as a factor behind the exchange rate surge. Analysts suggest that the tax reform proposals related to corporations and the stock market fell short of expectations, leading to increased disappointment and prompting foreign capital outflows. The KOSPI index closed at 3,119.41 on August 1, down 126.3 points (3.88%) from the previous session.

This was the largest daily drop since April 7 (-5.57%), a four-month high. Foreign investors sold off 660.2 billion won in the securities market, dragging down the overall index. Market experts unanimously noted, “Disappointing sell-offs poured in due to corporate performance concerns from proposed tax hikes and the failure of the separate taxation reform for dividend income to meet expectations, putting downward pressure on the won.

”Exchange rate experts predict that the won-dollar rate could remain elevated in the short term during the third quarter. Although the South Korea-U.S. trade negotiations have been finalized, the potential aftershocks of tariffs starting in September are raising concerns, and market uncertainty persists. Additionally, heightened risk aversion among global investors and the dollar’s appeal as a safe-haven asset are contributing to the exchange rate’s upward pressure. One foreign exchange expert commented, “The foreign exchange market is likely to move within a broad range of 1,350 to 1,420 won,” adding, “Until uncertainties are resolved, volatility itself is expected to increase rather than a clear directional trend.

”However, the possibility of exchange rate stabilization within the year cannot be entirely ruled out. If the Fed shifts to a policy of rate cuts or if the U.S. economy shows clear signs of slowing, the dollar’s strength could wane, creating room for the won to rebound, according to experts. Ultimately, experts agree that the exchange rate’s trajectory in the third quarter will hinge on the Fed’s monetary policy signals, the direction of global trade negotiations, and whether South Korea can restore policy credibility.

One foreign exchange expert noted, “The market is currently in a sensitive phase where it could swing dramatically in either direction,” predicting, “A ‘hyper-sensitive market’ where the exchange rate moves 30 to 40 won based on a single policy signal is likely to persist for the time being.”