South Korean Won Rebounds After President Yoon Lifts Martial Law Amidst Political Turmoil
The South Korean won experienced a tumultuous Tuesday, plummeting to a two-year low against the dollar before recovering ground following a dramatic reversal of a martial law declaration by President Yoon Suk Yeol. The currency’s rollercoaster ride mirrored the political upheaval in the country, as Yoon’s attempt to impose martial law was swiftly rebuked and overturned by the National Assembly. The incident underscored the fragility of the South Korean economy, already grappling with external pressures and internal political divisions.
The won’s initial plunge to 1,443.40 per dollar, its lowest level since October 2022, reflected investors’ immediate alarm at the president’s declaration. Yoon justified the drastic measure as necessary to defend the country’s constitutional order, accusing opposition parties of obstructing parliamentary processes and exacerbating a national crisis. However, the move was met with widespread condemnation and a swift legislative response. Lawmakers voted 190-0 to reject the martial law decree, with even members of Yoon’s own party urging him to rescind the order. Compelled by law to comply with the National Assembly’s decision, Yoon lifted the martial law, leading to a partial recovery in the won, which last traded around 1,418.18, still down nearly 1% on the day.
The dramatic turn of events highlighted the political tensions within South Korea and raised concerns about the potential economic fallout. While the immediate currency crisis was averted, the underlying issues contributing to the won’s weakness remain. Market analysts viewed the episode as a largely localized event with limited global impact. Marc Chandler, chief market strategist at Bannockburn Forex, characterized the situation as "very confusing" but emphasized that the South Korean won is a restricted currency with limited exposure for most U.S. corporate clients. Furthermore, he noted that the majority of trade between the U.S. and South Korea is conducted in U.S. dollars, mitigating direct currency risks.
The volatile day also saw significant swings in South Korean stock ETFs listed overseas. The MSCI South Korea ETF and the Franklin South Korea ETF initially dipped sharply but later recovered some of their losses, mirroring the trajectory of the won. Despite the rebound, both ETFs remained in negative territory, reflecting lingering investor anxieties. The won’s year-to-date decline of more than 9% underscores its vulnerability to a confluence of factors, including aggressive interest rate cuts by the Bank of Korea, aimed at stimulating the economy, and investor flight from export-dependent markets facing the headwinds of U.S. trade tariffs on China.
Experts believe the underlying economic challenges facing South Korea contribute to the won’s vulnerability and amplify the currency’s sensitivity to political events. Rong Ren Goh, a portfolio manager at Eastspring Investments in Singapore, pointed to the pre-existing pressure stemming from potential tariffs and their negative impact on export-oriented economies. Goh argued that the martial law episode, while short-lived, is likely to further weaken the won, making it a target for speculators looking to capitalize on tariff-related risks. The incident serves as a stark reminder of the interconnectedness of political and economic stability and the potential for political uncertainty to exacerbate existing economic vulnerabilities.
The South Korean won’s tumultuous day underscores the complexities of the country’s economic and political landscape. While the immediate crisis was averted, the underlying issues, including the threat of escalating trade tensions and aggressive monetary easing, continue to weigh on the currency. The incident also highlighted the significance of political stability for investor confidence and underscored the potential for political events to trigger market volatility. The coming weeks and months will be crucial in determining whether South Korea can navigate these challenges and restore stability to its currency and economy. The international community will be closely monitoring the situation, particularly given South Korea’s important role in the global economy and its strategic position in a region marked by increasing geopolitical tensions.
