Part 5 · Exchange rates and exports: the key to the Korean market · Lesson 24
Why do exchange rates move?
The exchange rate is also a tug-of-war between the force wanting to buy dollars and the force wanting to sell them. Rate differentials, the trade balance and crisis sentiment change those forces.
QToday's question
USD/KRW, which topped 1,550 in June 2026, came back down to the 1,350s three months later. What moved the exchange rate this much?
The exchange rate moves a few won up and down in a day, but sometimes it moves close to 200 won within a few months. Summer 2026 was like that. In September of the same year, the won actually got stronger even though the US raised interest rates. In this lesson we break down the forces that move the exchange rate one by one and check with real charts which force was strongest.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 23 you learned that the exchange rate is "the dollar's price tag." Since it is a price, it moves with demand and supply from Lesson 3. The Korea-US rate inversion from Lesson 13, market interest rates from Lesson 14, net exports from Lesson 4, and what is priced in from Lesson 20 are used together today.
- STEP 1 · Core conceptExchange rates are demand and supply too
You can separate who buys and who sells dollars, and explain the direction of the exchange rate through changes in dollar demand and supply.
- STEP 2 · Understanding the mechanicsThree forces that move exchange rates
You can say which way the Korea-US rate differential, the trade balance and risk-off sentiment each push the won, and work through cases where the forces conflict.
- STEP 3 · Real-world applicationRe-reading the 2015–2026 exchange rate
You can explain the exchange-rate surges and drops of 2022 and 2026 with rate-differential and dollar-index charts, and connect exchange-rate news to stock market flows.
STEP 1Exchange rates are demand and supply too
In Lesson 23 we said the exchange rate is the price of the dollar. So let's first sort out who buys and who sells dollars.
Easy analogy · The customers of the dollar shop
Recall the "dollar shop" from Lesson 23. The shop has customers who come to buy dollars and customers who come to sell them. Refiners that must import crude oil and individual investors who want to buy US stocks come to buy dollars. Companies that exported semiconductors and received dollars, and foreigners who want to buy Korean stocks, come to sell dollars.
On days when many customers come to buy, the shopkeeper raises the price tag, and on days when many come to sell, the shopkeeper lowers it. When the exchange rate moves, it means these two lines have changed in length.
The dollar shop is a hypothetical situation to aid understanding.
The buyers and sellers of dollars
In the actual foreign exchange market, there are two main reasons for buying and selling dollars: to buy and sell goods and services, and to invest, borrow or repay money.
Dollar demand ↑ → exchange rate up (weak won)
Dollar buyers- Companies that import crude oil, parts and grain
- Overseas travel, study abroad, overseas online shopping
- Individuals and pension funds investing in US stocks and bonds
- Foreigners who sell Korean stocks and pull out their money
- Companies that must repay dollar debt
Dollar supply ↑ → exchange rate down (strong won)
Dollar sellers- Exporters converting export proceeds into won
- Foreigners who want to buy Korean stocks and bonds
- Companies and banks borrowing dollars from abroad
- Foreign tourists visiting Korea
- Authorities selling dollars when the market is shaken too much
In the foreign exchange market, exporters converting the dollars they received into won is called . In years when exports do well, this dollar selling comes steadily and holds the exchange rate down. Conversely, when foreigners sell Korean stocks heavily and leave, they must buy dollars with the won they raised, so the exchange rate rises.
In summary, the exchange rate is the point where dollar demand and supply from "current transactions" (imports and exports, travel and so on) and "capital transactions" (investing, borrowing and repaying) meet. When the combined flow tilts to one side, the exchange rate moves a lot.
Quick checkForeign investors sold Korean stocks all month. What pressure does that put on the exchange rate?
STEP 2Three forces that move exchange rates
There are countless reasons to buy and sell dollars, but the forces that change the big trend can be grouped into three.
Force 1. The Korea-US rate differential
Money wants to flow to where it earns more interest. When US interest rates are higher than Korea's, dollar deposits and US Treasuries become more attractive, and demand to convert won into dollars grows. This gap is called the . As seen in Lesson 13, in July 2022 the US policy rate (upper bound 2.50%) overtook Korea's (2.25%) and rates inverted, and from July 2023 until the US cut in September 2024 the gap stayed wide at −2.00 percentage points.
However, the market reacts first to expectations of the future rate differential rather than the current one. This is the same principle as market rates in Lesson 14 and what is priced in in Lesson 20. If a US rate hike was already expected, the dollar can even weaken on the day of the actual hike.
Force 2. The trade balance and the current account
If the dollars earned from exports exceed the dollars spent on imports, there is a surplus. A large surplus means more dollars are sold into the market, which strengthens the won. A broader scorecard that adds services, dividends and interest is called the . For a country with positive net exports, as learned in Lesson 4, this force generally supports the won.
2022 was the opposite. A surge in oil prices greatly increased energy import costs, and the annual trade balance recorded a deficit of $47.2 billion. It was the largest annual deficit on record and the first deficit in 14 years.
Force 3. Risk-off sentiment
When anxiety grows, as with wars, financial crises or stock market crashes, investors rush into the dollar, the safest and most widely usable money. This is called . At such times, emerging-market currencies and those of export-driven countries like Korea generally weaken. The surges of 1997 and 2009 seen in Lesson 23 are typical examples. Conversely, when markets stabilize and sentiment turns to seeking risk assets, money flows back into the won.
One more thing to add is the strength of the dollar itself. The dollar's value against other currencies such as the euro and yen is measured by the . When the dollar strengthens worldwide, USD/KRW tends to rise regardless of anything specific to the won.
See it in a picture: a tug-of-war of three forces
Pick a situation for each of the three forces. The arrow is the direction in which that force pushes the won, and the bar below is the combined result of the three forces. You can also load actual periods with the buttons.
Korea-US rate differentialForce 1
Trade balanceForce 2
Market moodForce 3
A hypothetical simplification that treats the three forces as equal in size. In reality, which force is stronger differs from period to period.
"Fall 2022" has all three forces on the weak-won side, so the bar goes to the far right. "June 2026" is a period when rates and anxiety were stronger even though the trade balance showed a large surplus, and "September 2026" is a period when the surplus force was ahead. We check how things actually moved in STEP 3.
Common misconceptions
- "If the US raises rates, the exchange rate must rise?"
- If a hike was already expected, it is already in the price. In September 2026 the Fed raised rates 0.25 percentage points, but the hike had largely been anticipated and export dollars poured in, so the monthly average USD/KRW actually fell from 1,403 in August to 1,359 in September.
- "The government sets the exchange rate?"
- Korea is a country where the exchange rate is set by the market. The government and the Bank of Korea can only with words or dollar sales when moves become too one-sided, and it is hard to change the direction itself for long.
- "A big trade surplus always strengthens the won?"
- The effect shrinks if companies hold on to the dollars from the surplus instead of converting them into won, or if more dollars leave for overseas investment during the same period.
Quick checkKorea's trade balance shows a large surplus, but war breaks out in the Middle East and global stocks plunge. Which way is the won likely to move?
STEP 3Re-reading the 2015–2026 exchange rate
Let's lay the three forces over real numbers. Switch tabs, and tap the chart to see that month's numbers.
USD/KRW monthly average (left, KRW) and Korea-US policy rate differential (right, Korea − US upper bound, percentage points) · Jan 2015 – Sep 2026
USD/KRWKorea-US rate differential (below 0 = US higher)
USD/KRW monthly average (left, KRW) and the Fed's broad dollar index (right, Jan 2006 = 100) · Jan 2015 – Sep 2026
USD/KRWBroad dollar index
Tap the chart or swipe a finger across it.
Source: FRED EXKOUS (USD/KRW monthly average), DFEDTARU (US policy rate target upper bound), DTWEXBGS (broad dollar index, daily data averaged by month), Bank of Korea ECOS 722Y001 (Korea policy rate, monthly). Retrieved 2026-10-05. Correlation coefficients were calculated directly from monthly figures for Jan 2015 – Sep 2026.
What the two charts tell us
Calculating 141 months from January 2015 to September 2026, the correlation coefficient between USD/KRW and the Korea-US rate differential was −0.70, and between USD/KRW and the dollar index it was +0.83. This means the exchange rate tended to be higher when US rates were relatively higher, and even more clearly, USD/KRW was higher when "the dollar as a whole was strong." Remember that a large part of the won's movement is not just a story about the won but a story about the dollar.
But there are clearly periods that the rate differential alone does not explain. In October 2022, when the differential was −0.25 percentage points, the exchange rate was higher than in 2023–2024, when the differential was widest at −2.00 percentage points. This is because the other two forces moved together.
Scene 1: 2022, three forces in one direction
In 2022 the US raised rates by 0.75 percentage points four times in a row, in June, July, September and November, and in July Korean and US rates inverted. That year the trade balance was a $47.2 billion deficit, the largest annual deficit on record, and global stocks wobbled on fears of tightening. The Fed's broad dollar index rose to 128.5 on Sep 26. With the rate differential, the trade balance and risk-off all pointing toward a weak won, USD/KRW rose to KRW 1,444.2 intraday on Oct 25.
Scene 2: June 2026, when only the won was unusually weak
Look at the second tab. The monthly average USD/KRW in June 2026 was KRW 1,529, the highest since 2009, yet the dollar index was around 120, actually lower than in early 2025. The won was weaker than the dollar as a whole. At the time, foreigners had sold Korean stocks for 20 trading days in a row through June 5, anxiety grew as the Middle East war dragged on, and stronger-than-expected US jobs data dented rate-cut expectations. In overnight trading on June 5 the rate topped KRW 1,560, and on June 8 the government and the Bank of Korea issued a joint message saying they would "respond firmly to one-sided moves."
Scene 3: September 2026, when the force of the surplus won
After the summer, the trend reversed. On demand for AI semiconductors, cumulative exports for January–August 2026 reached $709.4 billion, already surpassing the full-year 2025 record, and exporters steadily sold the dollars they received. A stronger yen also lifted the won. USD/KRW fell to KRW 1,349.5 intraday on Sep 4, entering the KRW 1,340s for the first time in 14 months. Even though the US raised rates in September and the differential was −1.00 percentage point, the force of the trade balance was stronger.
Figures for the scenes: the Fed rate hike schedule is from FRED DFEDTARU; the 2022 trade balance from the Ministry of Trade, Industry and Energy (Yonhap News 2023-01-01); the 2022 peak from Yonhap News (2022-10-25); June 2026 from Yonhap News (2026-06-05), Yonhap News English (2026-06-05, 06-08) and The Korea Herald (2026-06-06); 2026 exports from Trading Economics (2026-09-07); and the September high from Yonhap News TV (2026-09-04).
For stocks: exchange-rate news is flow news
The forces that move the exchange rate overlap with money flows in the stock market. When foreigners sell Korean stocks, dollar demand rises and the exchange rate goes up, and when the exchange rate goes up, foreigners' dollar-based returns shrink, which can create a loop that triggers more selling. Conversely, in periods when the won strengthens on strong exports, foreign money tends to flow in. We look at this loop in detail in Lesson 27.
| News headline | Which of the three forces moved? | What to watch in stocks |
|---|---|---|
| "Dollar strengthens on US jobs surprise; won in the 1,500s" | Force 1 rate differential (rising expectations for US rates) + the dollar itself | Multiple − Interest-rate burden. Check foreign investor flows |
| "Record exports, strong won" | Force 2 trade balance | Earnings + Higher export volume. However, a strong won shaves some of the earnings converted into won |
| "Middle East tensions rise, safe-haven demand" | Force 3 risk-off | Multiple − Market-wide risk-off. Also watch the oil price path (Lesson 29) |
Check foreign investors' trading flows on the Flows page, and the path by which exchange rates connect with interest rates and inflation to sectors in the causal chain of the Macro Map.
Not always. The strength of the three forces differs from period to period, so the same rate hike can sometimes weaken the won a lot and sometimes have almost no effect. Exchange-rate forecasts often miss even among experts, so it is important not to call a direction from a single factor.
Quick checkUSD/KRW rose a lot, but the dollar index barely changed over the same period. What should you suspect?
✓What we learned today
- The exchange rate is set by a tug-of-war between dollar demand (import payments, overseas investment, foreign capital outflows) and dollar supply (export proceeds, foreign investment inflows).
- Three big forces: the Korea-US rate differential (the relatively higher US rates are, the more pressure for a weak won), the trade balance (the bigger the surplus, the more pressure for a strong won), and risk-off sentiment (the more anxious markets are, the more money rushes to the dollar).
- In monthly data for Jan 2015 – Sep 2026, USD/KRW showed a correlation of −0.70 with the Korea-US rate differential and +0.83 with the Fed's broad dollar index. "The strength of the dollar as a whole" drove the exchange rate more often than won-specific circumstances.
- In 2022 all three forces were on the weak-won side (KRW 1,444.2 intraday in October), and in September 2026, record exports lifted the won despite a US rate hike.
- When you see exchange-rate news, first check "which of the three forces changed" and "is it only about the won, or about the dollar as a whole?"
Now that you know why the exchange rate moves, it is time to weigh the results. In the next lesson we put the sectors that smile and those that cry when the won weakens on the scale, and calculate how exporters' and importers' earnings split.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which of the following pushes USD/KRW up (a weak won)?
When foreigners convert the won from their stock sales into dollars and leave, dollar demand rises and the exchange rate goes up. All the others are flows where dollars come in and are converted into won, so they push the exchange rate down.
Q2. When the US policy rate rises above Korea's, what pressure is the won likely to face?
Dollar assets that pay more interest become more attractive, and demand to convert won into dollars grows. However, rate changes that are already expected are already priced in.
Q3. Which of the following is NOT a background factor for USD/KRW rising to KRW 1,444.2 intraday in October 2022?
In 2022 Korea's trade balance was a $47.2 billion deficit, the largest annual deficit on record. It was a year when all three forces, the rate differential, the trade balance and risk-off, were on the weak-won side.
Q4. If USD/KRW rose a lot but the dollar index barely changed, how is it best interpreted?
If the dollar as a whole did not strengthen, suspect won-side circumstances such as foreign capital outflows, the trade balance, or risks especially large for Korea. June 2026 was like that.
Q5. What is the best reason the monthly average USD/KRW fell from August in September 2026, even though the US raised rates?
The market reacts to the gap versus expectations (Lesson 20). The hike was already priced in, and the dollars pouring in through exporters' dollar selling lifted the won. When forces conflict, the stronger force sets the direction.
NextTerms · Next lesson · Related tools
The rate at which the currencies of two countries are exchanged. USD/KRW 1,400 means it costs 1,400 won to buy 1 dollar.
Weak wonWeak wonA rise in USD/KRW, that is, a fall in the value of the won. It is generally favorable for exporters.
Strong wonStrong wonA fall in USD/KRW, meaning the won's value rises so the same won can buy more dollars. Also called won appreciation.
Korea-US rate differentialKorea-US rate differentialKorea's policy rate minus the US policy rate. The deeper it goes negative (the higher US rates are), the more pressure there generally is for a weak won. It inverted in July 2022.
Trade balanceTrade balanceGoods exports minus imports. A surplus brings more dollars into the market and pushes toward a stronger won, while a deficit pushes toward a weaker won. It is released by the Ministry of Trade, Industry and Energy on the 1st of each month.
Current accountCurrent accountA scorecard of money exchanged with the rest of the world: goods trade plus services (travel, transport) and income such as dividends and interest. It is published by the Bank of Korea.
Risk aversion (safe-haven preference)Risk-offA phenomenon in which, when anxiety grows from events like war, financial crises, or sharp stock market drops, investors sell stocks and emerging-market currencies and flock to safe-haven assets such as the dollar, government bonds, and gold. The won generally weakens at such times.
Dollar indexDollar indexThe average value of the dollar against several currencies such as the euro and yen. There is the DXY, based on six major currencies, and the Fed's broad dollar index, which covers a wider group of trading-partner currencies.
Exporters' dollar sellingExporters' dollar sellingThe foreign exchange market's term for exporters selling the dollars they received to banks and converting them into won. The better exports do, the more dollar supply there is, holding the exchange rate down.
FX interventionFX interventionWhen the exchange rate moves too fast in one direction, the government and the Bank of Korea smooth the pace with words (verbal intervention) or dollar trading. It is used to ease one-sidedness rather than to change the direction for long.
Foreign exchange reservesForeign exchange reservesForeign-currency assets such as dollars that the Bank of Korea and the government stockpile to prepare for crises. They act as an emergency fund when the foreign exchange market is shaken too violently.
Policy ratePolicy rateThe policy interest rate set by a central bank (the Bank of Korea, the US Fed). It is the starting point for all other interest rates.
FedFed, US Federal Reserve SystemThe central bank of the United States. It sets the policy rate with the goals of price stability and maximum employment.
DemandDemandThe quantity that people want to buy at a given price. Normally, as the price rises, the quantity demanded falls (the law of demand).
SupplySupplyThe quantity that sellers are willing to sell at a given price. Normally, as the price rises, the quantity supplied increases (the law of supply).
Priced inPriced inA state in which something expected to happen is already reflected in prices such as stock prices or interest rates. If things happen as expected, prices do not move much.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.