THE EFFECTS OF USD TO KRW EXCHANGE RATE ON THE FUTURE OF THE KOREAN ECONOMY

[SEPTEMBER 2022]

Recently, the USD to KRW conversion rate has been skyrocketing. The exchange rate for USD in KRW is the highest since March 2009. This means that the number of KRWs needed to buy 1 U.S. Dollar has increased.

The reason behind the strength of the dollar and the decreasing value of the Korean won is the decreasing demand for semiconductors. Korea is a large exporter of semiconductors but due to the decreasing demand for semiconductors, Korea has fewer exports. As a result, Korea has a trade deficit, which means that imports outweigh exports. This is Korea’s first trade deficit in 14 years. Also, the Korean Government has been narrowing their current account surplus (credits exceeding debits), which makes the won even less attractive.

Furthermore the U.S. Federal Reserve has raised the base interest rate greatly to deal with inflation, which makes the dollar more attractive. The aftermath of COVID-19 on the economy has caused inflation. A high base interest rate attracts many foreigners due to increased savings rates.

In general, the Dollar increasing in value is a threat to the Korean economy. In simple terms, it causes inflation for the Korean economy. Since the U.S. Dollar is the base currency for the world, companies trade internationally using the dollar. If the value of the dollar goes up, Korean companies need to pay more KRWs for items. And since there is a higher cost for the items, in order to maintain the same margin, the companies must slowly increase their prices, leading to inflation.

Image Source: gettyimagesbank.

By. Eugene Jeung