The South Korean currency, the won, has seen a significant drop in value during December 2024. This decline was triggered by a period of political unrest that followed the brief implementation of martial law. According to recent data from the Bank for International Settlements (BIS), the real effective exchange rate (REER) of the won fell to 91.3 at the end of December, marking a decrease of nearly two points from the previous month. The REER measures a currency's strength relative to a basket of other currencies, adjusted for inflation. A figure below 100 indicates depreciation compared to the base year, while above this benchmark suggests appreciation.
This dramatic shift placed South Korea second on the list of 64 BIS-monitored countries, just ahead of Japan, whose REER stood at 71.3. The monthly decline of almost two points was one of the fastest globally, behind only Brazil and Australia. The won's depreciation was the most severe since September 2022, when it experienced a sharp fall due to the Legoland debt crisis, leading to heightened concerns about corporate bond yields and credit availability. Exchange rates reflected this instability, with the won weakening significantly against the U.S. dollar throughout December, starting from approximately 1,370 won per dollar in November and reaching 1,486.7 won by late December.
The turbulence in the foreign exchange market was heavily influenced by political changes brought about by the imposition of martial law. Governor Rhee Chang-yong of the Bank of Korea addressed these issues in a January press conference, noting that the won-dollar exchange rate had risen beyond what economic fundamentals would suggest. He highlighted the impact of the widening interest rate gap with the United States. Despite these challenges, the situation underscores the resilience and adaptability required in global financial markets, emphasizing the importance of stable governance and sound economic policies to maintain currency stability and investor confidence.