Won weakens as U.S.-South Korea trade tensions fuel crisis fears

Hello, I’m Thomas Park.

Today, I’d like to talk about the South Korean economy, not the U.S. economy. Tensions over recent trade negotiations between the United States and South Korea have intensified, sending the won sharply lower. Some are even warning of a repeat of the 1997 financial crisis. What exactly is happening?

$350 Billion Investment Pledged, but How It Will Be Carried Out Remains Unclear

At a summit between the two countries last August, South Korea pledged to invest $350 billion (about 487 trillion won) in the United States in exchange for tariff cuts by the Trump administration. That astronomical sum equals 84% of South Korea’s foreign exchange reserves.

The problem is how the investment would be made. The United States is demanding “cash investment,” as it did from Japan, but South Korea can raise only about $30 billion in foreign currency a year at most. In effect, it is being asked to provide an amount that would take 12 years to raise.

In a recent interview with foreign media, the Lee Jae-myung administration effectively rejected the demand, saying, “If we withdrew $350 billion in cash as the United States is asking and invested it all in the U.S., we could face a crisis on the scale of the 1997 financial crisis.” Lee went so far as to say, “If I had accepted that demand, I would have been impeached.”

No Currency Swap, and South Korea Loses Its Safety Net

More concerning, the United States appears opposed to a currency swap with South Korea, which the country urgently needs.

A currency swap is like an “overdraft account between countries”: one country deposits its own currency with another and borrows the other country’s currency at a pre-agreed exchange rate. For South Korea, it is an essential safeguard for raising $350 billion in the foreign exchange market.

But the United States is taking a hard line. First, it worries that providing a currency swap would weaken its leverage in negotiations on trade and investment, semiconductor supply chains, foreign exchange policy transparency, and other issues. Second, because the won is not a global reserve currency and accounts for a small share of foreign exchange trading, the United States sees little benefit relative to the risk.

The United States has unlimited currency swap lines with major reserve-currency issuers such as Japan, the European Central Bank, the United Kingdom, and Switzerland, but it is opposed to one with South Korea. This poses a serious threat to South Korea’s currency stability.

Won at 1,540: Could the Last Line of Defense Break?

As tensions between the United States and South Korea have deepened, the won has plunged against the dollar. On September 26, the exchange rate jumped above 1,412 won per dollar in a single day, while the KOSPI plunged more than 100 points.

Experts are watching the possibility that the exchange rate could break into the 1,500s, while some see 1,540 won as a psychological line in the sand. If that level is breached, foreign investment outflows could accelerate and turmoil in financial markets could intensify.

As of October 10, the exchange rate stood at 1,429.86 won, with the won down 2.89% over the past month. If conditions do not improve, a move above 1,500 may be only a matter of time.

Deteriorating U.S.-South Korea Ties, with Other Factors Adding to the Strain

The relationship between the United States and South Korea is about more than economics. The Trump administration did not apologize for the U.S. Immigration and Customs Enforcement (ICE) raid at construction sites for Hyundai Motor and LG Energy Solution plants in Georgia, fueling anti-American sentiment among South Koreans.

Disputes involving religious groups are also casting a subtle shadow over relations between the two countries. Some fear that tensions between the South Korean government and certain religious organizations close to the Trump administration could affect diplomatic ties.

South Korea’s Economic Outlook for Late 2025: Crisis or Opportunity?

South Korea’s economy is facing serious challenges. But there are also many ways in which the situation differs from 1997.

Risk Factors:

- Uncertainty over the $350 billion investment is delaying tariff negotiations with the United States

- The lack of a U.S.-South Korea currency swap leaves the foreign exchange safety net vulnerable

- The won’s sharp decline is accelerating foreign investment outflows

- A shortage of dollar liquidity is disrupting companies’ overseas transactions

- The KOSPI is plunging and financial market instability is mounting

Positive Factors:

- Unlike in 1997, South Korea’s foreign exchange reserves are currently adequate ($417 billion)

- External debt is relatively well managed

- Key industries, including semiconductors, remain competitive

- Exporters have strengthened their business fundamentals

Scenarios to Watch

Worst-case scenario: If U.S.-South Korea negotiations collapse and the United States imposes 25% tariffs, the exchange rate could exceed 1,600 won per dollar. In that case, a sharp rise in import prices could reignite inflation, increase companies’ debt repayment burdens, weaken consumer spending, and trigger a full-blown economic downturn.

Middle scenario: If the two countries reach a compromise on phased investment, the exchange rate could stabilize at 1,450–1,500 won per dollar. The economy would maintain modest growth, but uncertainty would persist for some time.

Positive scenario: If South Korea proposes an alternative investment structure and the United States accepts it, the exchange rate could stabilize below 1,400 won and foreign investment could return. For now, however, this appears unlikely.

Advice for Investors

First, increase your allocation to dollar assets. To hedge against the risk of a weaker won, consider increasing your holdings of dollar deposits or dollar-denominated assets.

Second, look to domestic-focused stocks rather than major exporters. A weaker won benefits exporters, but uncertainty over trade with the United States is currently a bigger concern. Stable companies focused on the domestic market may be relatively safer.

Third, don’t overreact to short-term volatility. Historically, the United States and South Korea have eventually found common ground despite periods of tension. Maintain a long-term investment perspective while managing risk through diversification.

Conclusion

South Korea’s economy is at a critical turning point. How the $350 billion investment issue is resolved will shape the country’s economic trajectory for years to come.

The Lee Jae-myung administration faces the difficult task of protecting South Korea’s national interests while repairing ties with the United States. The Trump administration, too, must recognize that it cannot afford to lose an important ally like South Korea.

We hope the two countries can find a practical compromise before the psychological line of 1,540 won per dollar is breached. That would benefit not only South Korea’s economy but also the U.S. economy and global economic stability.

I’ll continue to closely monitor and analyze developments to help you protect your hard-earned assets.

Thank you.