Edward Lee, Standard Chartered's (SC) chief economist and head of foreign exchange for ASEAN & South Asia, speaks to The Korea Times at a hotel in Seoul, Jan. 10. Courtesy of SC Korea
The volatility of the Korean won could exceed that of other Asian currencies in 2025, but the Bank of Korea (BOK) is well-prepared to manage such fluctuations, according to Edward Lee, Standard Chartered's chief economist and head of foreign exchange (FX) for ASEAN & South Asia.
"The Korean won has a very high beta (sensitivity) to Trump's trade policies. It's a highly traded, and liquid Asian currency. In that sense, volatility in the Korean won could be higher than some of the other currencies," Lee said in an interview with The Korea Times during a recent visit to Korea.
Lee also highlighted Korea's close economic ties with China and its reliance on trade, factors that make the won particularly vulnerable to external shocks.
In recent months, the Korean won has experienced significant depreciation, partly as a result of President Yoon Suk Yeol's failed attempt to impose martial law. Along with the strengthening of the U.S. dollar, the Korean currency has weakened by 50 won since early December, even reaching 1,480 per dollar. This is a level not seen in 15 years, dating back to the global financial crisis.
"Korean won at this level is actually quite competitive. Quite cheap, rather," Lee said.
Despite the depreciation, Lee noted that significant capital outflows are unlikely. While foreign holdings of Korean bonds remain elevated, equity positioning is slightly underweight. Nonetheless, Korea is still seeing substantial weekly inflows of nearly $1 billion in the equity market.
Could there still be a possibility of the won weakening further to 1,500 against the dollar?
Lee pointed out that such a possibility always exists.
"If the U.S. dollar index goes back to the last high in 2022, we could imagine, without even domestic factors, the won-dollar exchange rate can go there. It (1,500) seems like a big number, but it's not that far."
The continued unpredictability of Trump's trade policies continues to put pressure on Asian currencies, including the won. Some market observers anticipate strong rhetoric on tariffs as Donald Trump's inauguration approaches.
Yet, external factors can change quickly, particularly with Trump, according to Lee.
"What if Trump says he is going to focus more on immigration, rather than trade tariffs on China. Or what if he says he wants to negotiate more (with China), or even comes up with positive comments about Xi Jin Ping?" Lee questioned. "Suddenly, the narratives change (and the market reacts differently)."
This unpredictability underscores the importance of monetary authorities in managing currency volatility. According to Lee, Korea is well equipped in this regard, due to the BOK's strong management capabilities.
The BOK's import cover — the number of months of imports that can be covered by the central bank's FX reserves — stands at approximately eight months. Although this has declined from previous highs, it remains robust compared to other countries in the region, Lee said.
Additionally, Lee viewed the National Pension Fund's (NPS) FX strategic hedging could help mitigate the volatility of the Korean currency. The NPS is anticipated to sell a portion of its overseas assets through forward contracts, a move that could help alleviate pressure on the won and prevent it from weakening further against the dollar.
"The BOK also has the ability to take a look at its own domestic growth and inflation trajectory and make a more independent decision from the Federal Reserve," Lee said. "Other central banks may find it a bit tougher, because the flows may be a lot more dependent on the interest rate differential."