Whalesbook
Won Plunges to 15-Year Low Amid Global Pressures
The South Korean won has weakened sharply, reaching 1,517.3 per dollar on March 24, 2026. This marks its lowest level since March 2009, reflecting significant economic pressure. The currency has fallen 3.76% in the past month and 2.60% year-over-year. National Pension Service (NPS) Chairman and CEO Kim Sung-joo stated that these levels, which surpassed 1,500 won per dollar, are unsustainable. He believes a more appropriate exchange rate would be in the low 1,400s. NPS, which manages about $1 trillion in assets, is working with financial authorities to establish new frameworks for foreign exchange market stability. This includes reviewing strategic hedging strategies and potentially issuing foreign currency bonds.
Key Risks: Energy Costs, AI Competition, and Inflation Fears
South Korea's economy is heavily dependent on imported energy, sourcing nearly 98% of its fossil fuels from overseas. The ongoing Middle East conflict has pushed oil prices up, with Brent crude trading around $93 per barrel, a 50% increase year-to-date. This surge in energy costs, combined with the weakening won, drives up import expenses and manufacturing costs in South Korea, fueling fears of global stagflation. Economists forecast the won could trade as high as 1,516 per dollar in 2026, with further depreciation possible if conflicts escalate.
South Korea plays a critical role in the global AI supply chain, especially in advanced memory chips where companies like Samsung Electronics and SK Hynix are market leaders. However, this dominance faces growing competition. While Korea leads in memory semiconductors, China is making advances in system semiconductors and AI chip design, potentially challenging South Korea's edge. Currency stability is vital for maintaining export competitiveness. Yet, the usual benefits of a weaker won are becoming less pronounced as firms rely more on overseas production and imported materials. The Bank of Korea may also face constraints on its monetary policy, potentially delaying interest rate cuts needed to support economic growth due to concerns over the depreciating currency.
NPS Plans Currency Support: Hedging and Bond Issuance
The NPS is set to play a larger role in stabilizing the currency. The fund has begun strategic foreign exchange hedging operations, designed to manage currency risk and reduce won volatility rather than intervene directly. This strategy involves systematic hedging, particularly during periods of high market stress or sharp exchange-rate movements, effectively adding dollar supply and increasing demand for the won. Global investment banks estimate that strategic hedging could be triggered around the 1,480 won per dollar level. Discussions are also underway to amend the National Pension Act, which would allow the NPS to issue foreign currency bonds. This move aims to diversify funding and lessen dollar demand in the spot market, helping to stabilize the won. While the government is considering limits on the issuance amount relative to the fund's overseas investments to protect retiree funds, the potential for NPS to raise capital directly in international markets is seen as a major development. Morgan Stanley believes it could be a 'game changer' for the Korean won in 2026. The NPS's asset allocation targets for 2026 include domestic fixed income at 24.9%, domestic equity at 14.9%, global equity at 37.2%, global fixed income at 8.0%, and alternatives at 15.0%.
Persistent Economic Challenges and Competition
Despite the NPS's planned support, significant economic risks remain. South Korea's heavy reliance on imported energy makes it highly vulnerable to prolonged geopolitical conflicts and supply chain issues, which could drive oil prices higher and worsen stagflationary pressures. The global private credit market is showing signs of distress with rising default rates, potentially leading to broader financial instability. Furthermore, the ongoing competition with China in critical AI semiconductor segments presents a long-term challenge, risking South Korea's technological lead if not addressed. The country's export-driven economy is also being tested, as reliance on overseas production and imported components lessens the typical advantages of a weaker currency.
2026 Outlook for the Won and Economy
Economists predict a challenging year for South Korea in 2026, forecasting GDP growth around 1.8%. The won-dollar exchange rate is expected to reach an average of 1,516. Key factors for managing currency volatility will be the successful amendment of the National Pension Act and the scale of NPS's FX bond issuance and hedging activities. While these measures aim to provide stability, analysts remain watchful of persistent external pressures and the potential for further currency declines, especially if geopolitical tensions continue. The median end-2026 KRW/USD forecast from Reuters analysts is 1,418.5, though this may be influenced by ongoing trends like increased overseas securities investment.