South Korea's Won Weakness: Investment Deal Side Effect?

$129.4 billion. That's how much South Korean residents invested in overseas securities from January to November last year—exceeding the country's current account surplus of $101.8 billion over the same period. Money flowing out faster than it's coming in.

A new report from the Korea Institute of Finance suggests the won's recent weakness isn't just about this investment surge. Researcher Song Min-ki points to a more complex picture: expectations of massive dollar demand tied to Seoul's investment pledge under a trade deal with Washington are amplifying currency pressures.

The Numbers Behind the Decline

On the surface, it's a classic supply-demand story. Korean investors' overseas securities investments exceeded the current account surplus by $27.6 billion, creating what Song calls "a significant supply-demand imbalance in the domestic foreign exchange market." But he notes this doesn't fully explain the recent spike in dollar demand.

The Bank of Korea governor recently expressed bewilderment at the won's sharp decline, calling for foreign exchange hedging by the national pension fund. Meanwhile, the US Treasury has acknowledged the won's "excessive" depreciation—a rare admission that suggests even Washington sees the move as overdone.

Investment Deal Expectations Drive Sentiment

Here's where it gets interesting: a trade deal that hasn't been fully announced is already moving markets. Expectations of Seoul's investment package in the US are creating anticipatory dollar demand, even as the ruling party aims to pass related legislation by late February or early March.

The government is also considering temporary tax benefits for investors who bring money back home—a clear signal that capital outflows have become a policy concern. But with investment scale and timing still unclear, markets are pricing in scenarios based on speculation rather than facts.

Multiple Pressures Converge

The currency weakness reflects broader structural shifts in how Korean capital flows globally. Export concerns amid US tariff pressures add another layer of complexity, as does the domestic low-interest environment that makes overseas investments relatively attractive.

Meanwhile, geopolitical tensions and changing US monetary policy create additional volatility. Korean companies and investors are diversifying internationally at an unprecedented pace, fundamentally altering traditional currency dynamics.

Policy Responses and Market Reality

Seoul's response has been measured but telling. Beyond the tax incentives for returning capital, officials have emphasized that recent US Treasury comments reflect the importance of stable exchange rates for the investment pledge. It's a delicate balance: too much intervention risks trade tensions, too little risks economic instability.

The challenge is that market forces may be stronger than policy tools. With Korean households and institutions increasingly looking overseas for returns, and US investment commitments creating structural dollar demand, traditional currency management approaches may prove insufficient.